Trigger
A standing instruction that automatically redeems or switches units when a market level, NAV, date or percentage change is reached — a one-time facility that ends once it has fired.
In plain language
Investors often know what they want to do — "sell if the market gets to this level", "get out if I lose 15 percent" — and then miss the moment because they could not give the instruction in time.
The workbook: it is not uncommon for investors to rue missed opportunities of buying or selling because they could not give the requisite instructions in time. This is addressed through the trigger option that is offered by some mutual funds.
The investor sets the condition in advance. When it is met, the fund acts — without the need for going through a separate re-purchase documentation.
How it works
Kinds of trigger in Chapter 9.12.
| Trigger | What sets it off | Typical action |
|---|---|---|
| Market level | An index reaching a specified level | Redeem, to book profit |
| Date | A particular date | Redeem the units specified |
| Stop-loss | A specified NAV level or percentage depreciation in value | Usually redeem the entire investment |
| Appreciation | A specified rise in value | Usually redeem only the appreciation |
| Market fall into equity | The market falling, say, 20 percent, or the equity scheme's NAV falling by a set percentage | Transfer money into the equity scheme |
The choices. Triggers are typically set on the value of indices or of the investment. On activation, the investor can redeem just the appreciation, the entire holding, or a percentage of the current value — or switch to another scheme.
The fund's rules.
- Mutual funds decide which types of triggers are offered, and on which schemes.
- A separate trigger request is needed for each investment under a folio.
- A notice period may be specified for registering and cancelling a trigger.
- A trigger is a one-time facility that extinguishes when the trigger is activated and the corresponding action is completed.
The cost of certainty. The workbook states it plainly: if the market continues to go up after the trigger is activated, the investor loses on the further gain.
A worked example
Nisha invests Rs 4,00,000 in an equity scheme at an NAV of Rs 50, receiving 8,000 units. She registers two triggers on this investment. Figures are illustrative.
Stop-loss trigger: redeem everything if the value falls 15 percent.
Trigger NAV = 50 × (1 − 15%) = Rs 42.50
Value at trigger = 8,000 × 42.50 = Rs 3,40,000
Appreciation trigger: redeem the appreciation when the value reaches Rs 5,00,000 (an NAV of Rs 62.50).
The market rises. At an NAV of Rs 62.50 the appreciation trigger fires:
Appreciation redeemed = 5,00,000 − 4,00,000 = Rs 1,00,000
Units redeemed = 1,00,000 ÷ 62.50 = 1,600 units
Units left = 6,400 units
The redemption carries whatever exit load and tax apply to any redemption. The appreciation trigger is now extinguished; if the NAV reaches Rs 62.50 again next year, nothing happens unless she registers a fresh one.
The NAV then climbs to Rs 70. The Rs 1,00,000 she took out would have been worth 1,600 × 70 = Rs 1,12,000 had she stayed — the Rs 12,000 is the further gain the workbook warns a trigger gives up.
Why NISM asks about it
Chapter 9.12 (Operational aspects of Systematic Transactions) covers triggers at the end of the section. Expect a definition question and the operational points: triggers can be based on market level, NAV, date or percentage change; one request per investment in a folio; the fund decides which triggers and schemes are offered; and a trigger is one-time — it extinguishes once activated. The "loses further gain" point is a likely true/false.
Common exam traps
- A trigger is one-time. It does not reset after firing.
- One request per investment under a folio — not one per folio.
- The mutual fund decides which triggers and schemes are available; they are offered by some funds, not all.
- After a profit-booking trigger, the investor forgoes any further rise.
- Triggers can also buy: a market fall can trigger a transfer into equity.
Where this is taught
- Series V-D · Chapter 9: Investor Servicesintroduced here
- Series V-B · Chapter 9: Investor Servicesintroduced here
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Cut-off timeThe SEBI-prescribed clock time that, read together with the time stamp on the request, decides which day's NAV a mutual fund transaction is priced at.
- Exit loadA charge levied when an investor redeems units, calculated as a percentage of NAV and deducted from it, usually only if the units are sold within a stated holding period.
- Systematic Transfer PlanA standing instruction to move a fixed amount from one scheme into another of the same mutual fund at a set frequency — a withdrawal plan out of the source and a SIP into the target.
- Systematic Withdrawal PlanA standing instruction to redeem a set amount — or only the appreciation — from a mutual fund scheme at a chosen frequency, used to manufacture a regular income in retirement.