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Capital protection schemes promise that at least the minimum amount, which has been invested, will be returned to the investor irrespective of the movements in the market over the stipulated period. Besides, the investor can get a healthy appreciation in case NAVs of the funds rise by that time.
It is widely known that such mutual funds are investing the bulk of their assets in bonds and debt instruments and the rest into equities, hoping for some capital appreciation. The SEBI order had also said that the mutual fund portfolio, under the scheme, must be rated by a SEBI registered credit rating agency.
Capital protection funds are very popular in West. However, when SEBI first came out with the guidelines for such schemes, there was widespread skepticism. After all, most investors who wanted a protection of their invested capital would be better off investing in bank fixed deposits. However, quite a few mutual funds have since filed applications with SEBI for launching their capital protection schemes. How the Indian investor responds to such schemes is yet to be seen
Capital protected fund
Are you an investor who seeks a high level of security without risks yet wishes to profit from positive stock market developments? Then the Capital Protected Fund is exactly right for you. The focus of this investment fund is security and guaranteed capital performance of the investment at the end of the fund's lifetime.
How it works:
At maturity you receive the highest market value achieved during the lifetime of the fund.
The "guaranteed maximum market value" at maturity of the fund applies to all fund units, irrespective of when you purchased them or their value at purchase. The "guaranteed maximum market value" of fund units is never lower than their value at the time of purchase.
If you buy back the units before the maturity date, the guarantee does not apply, and you redeem your fund units at the current market value.
When you invest in a mutual fund, you know that its NAV will be subject to market volatility, and there's no way a fund can assure you the safety of your capital or promise you dividends. But now, amended SEBI guidelines will allow MFs to launch capital protection schemes. But this won't really make a difference to you. Here's why.
A Capital Protection-oriented Scheme (CPS) will have to be a three-year, closed-end scheme. Redemption of units before maturity will not be allowed. SEBI is silent on whether these schemes can get listed on the stock exchanges. Assume, out of Rs 100, a CPS invests Rs 80 in a debt paper (three-year AAA-rated corporate paper yielding 8.75 per cent). The balance Rs 20 is invested in equities. While Rs 80 grows to around Rs 102 in three years, thereby protecting your capital, the Rs 20 equity investment can grow to Rs 30.4, assuming equities return 15 per cent compounded over three years. A CPS today would, therefore, yield a compounded return of around 8.6 per cent, post-tax and expenses (1.5 per cent assumed) in three years. The 8 per cent NSC locks your money for six years, while the PPF imposes a 15-year lock-in. CPS will be rated by a credit rating agency on its investment structure and ability to protect capital.
And that's the root of it. MFs will protect—not guarantee—the capital. So, you can't take the fund to court if it fails to guarantee your capital, because it's merely protecting it. Sandesh Kirkire, CEO, Kotak Mutual, says: "A mutual fund is not designed to guarantee capital. What a CPS will do is have such a blend of equity and debt instruments that the chances of capital erosion are minimal." So, remember the distinction between protection and guarantee and get into the product only if you can take the uncertainty.
The list of scheme-specific risk factors makes it clear that FTCPF is oriented towards protection of capital and there is no scope for guaranteed returns.
Also, the orientation is derived from the portfolio structure and not from any bank guarantee or insurance cover. In fact, the ability of the portfolio to ensure capital protection on maturity may well be impacted by interest rate movements and credit defaults. Besides, there are factors such as trading volumes, liquidity and settlement systems to consider.
The rating agency's assessment is not a comment on its NAV in relation to the face value, it is pointed out
Simple capital protection-oriented funds such as these ensure capital protection by investing a substantial portion of the corpus in high-quality debt at all points in time. The debt component is sized such that its redemption value at the time of maturity of the scheme will be equal to or greater than the amount invested by the investors.
In sizing the debt corpus, CRISIL has factored in the default risk of debt securities, the reinvestment risk of interim cash flows and the tenor risk arising on account of the inability to fully invest the fund`s corpus for the same time frame as that of the fund.
The CPF satisfies a felt need among Indian investors for an investment avenue that allows participation in the stock markets without the accompanying worries of capital erosion. The scheme will enable investors to benefit from the upside potential of equity investments without subjecting their capital to market-related volatility. Though a good product for first-time mutual fund investors, we believe that this fund has a place in the portfolio of all investors as all of us park some proportion of our savings in relatively safe investment avenues.”
“The fund’s hybrid structure and its ability to preserve capital are well-suited to current market conditions, where both the debt and equity markets have been displaying heightened volatility
“The equity portion of this fund will be managed in a flexible investment style designed to take advantage of opportunities across the market capitalization range.”
CRISIL has assigned provisional `AAA (so)` ratings to HDFC Mutual Fund’s HDFC Capital Guard Series I.
The ratings apply to the three-years plan and five-years plan offered under the scheme; a capital protection-oriented fund proposed to be launched by HDFC Asset Management Company.
The assigned ratings indicate the highest degree of certainty with regard to the timely payment of the face value of the units to unit holders on the maturity of the respective plans. The ratings reflect the significant degree of capital protection expected to be available to investors owing to the high proportion of debt in the portfolio, and the fact that the scheme’s debt investments will be confined to high quality debt securities such as government securities (G-Sec) and instruments rated `AAA` by CRISIL or equivalent, thus mitigating default risks.
Simple capital protection-oriented funds such as these ensure capital protection by investing a substantial portion of the corpus in high-quality debt at all points in time. The debt component is sized such that its redemption value at the time of maturity of the scheme will be equal to or greater than the amount invested by the investors.
In sizing the debt corpus, CRISIL has factored in the default risk of debt securities, the reinvestment risk of interim cash flows and the tenor risk arising on account of the inability to fully invest the fund`s corpus for the same time frame as that of the fund.
“We believe that the Franklin Templeton Capital Safety Fund satisfies a felt need among Indian investors for an investment avenue that allows participation in the stock markets without the accompanying worries of capital erosion. The scheme will enable investors to benefit from the upside potential of equity investments without subjecting their capital to market-related volatility. Though a good product for first-time mutual fund investors, we believe that this fund has a place in the portfolio of all investors as all of us park some proportion of our savings in relatively safe investment avenues.”
The scheme would primarily invest in high-quality fixed-income securities and it intends to generate capital appreciation by investing in equity and equity-related instruments as a secondary objective.
Besides, the debt investments in the scheme would be conservatively managed to reduce both credit and interest-rate risk.
The scheme or the plan would mature and be fully redeemed at the end of the specified period of the respective plans.
However, the AMC warned that the scheme offered is oriented towards protection of capital and not with guaranteed returns.
Further, the orientation towards protection of the capital originates from the portfolio structure of the scheme and not from any bank guarantee, insurance cover etc.
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