Mutual Funds: Trigger SIP, its benefits and factors to consider before investing in it

Systematic investment plans (SIPs) have become a popular investment option for many in India. It allows investors to invest a fixed amount at regular intervals in mutual funds. This disciplined approach to investing helps in averaging the cost of investments and reducing the impact of market volatility.

However, traditional SIPs come with a fixed investment schedule, and investors might miss out on opportunities to invest during market dips. To address this concern, trigger SIPs have emerged as an alternative investment strategy.

Trigger SIP is a variation of the traditional SIP that offers investors the flexibility to time their investments based on certain market conditions. Here, investors can set certain conditions, known as triggers, that activate or deactivate the investment into the mutual fund.

These triggers can be based on predefined market indices, specific stock prices, or even economic events.

How does trigger SIP work?

Trigger SIPs function based on the triggers set by the investors. These triggers are commonly of two types - a price trigger or a time trigger.

In a price trigger, investors set a specific price for the mutual fund. When the price of the fund reaches the trigger price, the investment is made. For example, if an investor sets a price trigger of Rs. 1000 for a particular mutual fund, the SIP will be triggered only when the NAV of the fund falls to or below Rs. 1000.

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On the other hand, in a time trigger, investors set a specific time period for investment. For instance, they might specify that they want to invest a lump sum amount in a mutual fund whenever there is a market correction of 10% or more.

What are the advantages of trigger SIP?

Tactical investing: Trigger SIPs enable investors to adopt a tactical approach to investing. By setting triggers based on market conditions, investors can time their investments to take advantage of market volatility.

Risk management: Trigger SIPs help in managing risk by allowing investors to avoid investing during periods of market uncertainty. For instance, if an investor has set a trigger to invest only when the market falls by a certain percentage, it provides a cushion against investing at elevated market levels.

Automation and discipline: Like traditional SIPs, trigger SIPs also offer the benefits of automation and discipline. Investors can continue to invest at regular intervals without the need for constant monitoring.

What are the key factors to consider before investing?

Before implementing trigger SIPs, investors should carefully consider certain factors to ensure their effectiveness and suitability for their investment goals.

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Firstly, investors need to possess a good understanding of market trends and technical analysis, as setting appropriate triggers requires market expertise. The selection of the right trigger is paramount to the success of the strategy. Triggers should be based on thorough analysis and rational decision-making rather than being driven by emotions.

Another important aspect to consider is the overall asset allocation of the investment portfolio. Investors must ensure that their portfolio is well-diversified across various asset classes and aligns with their financial objectives and risk tolerance. A well-diversified portfolio can help mitigate risks and improve overall returns.

It is also essential to take into account the costs and expenses associated with trigger SIPs. Additional transaction costs and expenses may be incurred, which can impact the overall returns. Investors should assess the cost implications and factor them into their investment strategy.

Trigger SIPs provide investors with an active approach to investing in mutual funds by allowing them to time their investments based on market conditions. However, investors should exercise caution, conduct thorough research, and seek professional advice before implementing a trigger SIP strategy.