As the whole market is moving up now, all the trailing stops in Mutual Fund schemes have been moving up and locking profits. Stop losses for the funds tracked and discussed in our You Tube Channel are published on weekly basis in this blog.
The use of stop losses in Mutual Funds is for conservative investors. Investors, those who have clear defined objectives on their investments.
If you want to increase the returns on your investments with defined risk like say, you are ok to take a 5% risk on your capital and the rest you want to be protected. In such conditions, out of your total investments, find the 5% amount.
Using the risks given for each scheme, calculate how much you can invest and set aside only that much of capital for the fund. As long as the fund is going up, hold the investment. Stop loss will be trailed as the NAV climbs up.
When the fund performance turns and hits the stop, move out & book profit.
Using this strategy, you will be able to manage your investments more prudently.
Let’s take an example. If an investor wanted to take 5% risk & in April he had invested in SBI Pharma fund, which carried a 5% risk. Today, in 3 months from the time we took the position, this fund has locked 17.40% gains.
By taking a 5% risk on the capital, this investor has made 17.40%. This strategy helps investors to maximize gains with conservative approach. In case the investment had turned sour, he would have only lost 5%. The balance capital is safe.
In this process, investments should be taken only when opportunities are available. When there is no opportunity, park the funds in debt funds to have returns that are above bank FD’s.