Great NFO Opportunities in the Month of April
Written on Friday, April 15, 2016
By Bajaj Capital Mutual Fund Group
Capital Protection Oriented Funds (CPOF) offered by Mutual Funds primarily invest in such a combination of Debt and Equity instruments that investor enjoys the benefit of higher principal preservation added with increased returns through some equity market exposure for long term. These funds are of close ended nature for 36 months (3 years) or more, which reduces possibility of making low returns on both asset classes – debt & equity.
Generally, these funds keep 70% to 95% in debt. Debt/bond allocation in the portfolio is designed in such a way that it grows to 100% or more at the time of maturity, thus technically preserving the principal. Remaining 5%-30% goes in equities, which works as additional return generator over the period.
UTI Capital Protection Oriented Scheme - Series VII – IV (1278 days) (Rated as CRISIL)
The scheme endeavors to protect the capital at maturity by investing in high quality fixed income securities as the primary objective and generate capital appreciation by investing in equity and equity related instruments as secondary objective.
Illustration of Capital Protection approach:
Following are the assumptions for the purpose of illustration:
Assuming that the fund invests 85% of portfolio in the highest rated fixed income instruments.
The debt portion of the portfolio will grow over the tenure of the Scheme to 100% of initial portfolio after taking care of the recurring expenses, hence protecting the capital.
The remaining 15% of the portfolio would be invested in equities and equity related instruments.
The return from the equity portion of the investment could be positive or negative depending on various factors.
However, at the end of the tenure i.e. around 3.5 years (1278 days), the value of the investment might have appreciated while providing capital protection to the portfolio.
* In case of negative or neutral market scenario, there will be no growth through investment in Equity, however the endeavor would be to protect capital through fixed income investments at maturity.
5 Reasons why to invest in UTI CPOS Series VII – IV (1278 Days):
Fund suitability & who should invest?
A risk averse investor who generally invest in to traditional forms of investments can make a transition to this fund.
Investors who want to participate in equities without risking their capital can seek protection to their capital through the debt portfolio as well as take exposure to equities through this fund.
This fund is suitable for investors who want to earn the current interest rate over the tenure of the scheme without taking any interest rate risk.
High Tax bracket investors of traditional investments (eg: fixed deposits etc.) who seek tax efficiency can take benefit of indexation and get an opportunity to earn better tax adjusted returns.
Features of the scheme:
Reliance Dual Advantage Fixed Tenure Fund IX- Plan C
Reliance Dual Advantage Fixed Tenure Fund IX – Plan C is a 1166 Days, close-ended hybrid scheme that seeks to generate returns and reduce interest rate volatility,through a portfolio of fixed income securities that are maturing on or before the maturity of the Scheme along with capital appreciation through equity exposure.
Reasons why to invest in this scheme:
The fund will endeavor to invest on an average of 80%-85% in assets in Debt Securities (Predominantly in NCDs) & Money Market Instruments and 15% - 20% the remaining in Equity & Equity related instruments/ securities.
Being a close ended, passively managed fund, the benefits of locking in at the current high levels in a high inflationary scenario can be reaped as liquidity & inflationary scenario improves.
3 years may be an appropriate time frame for equity as an asset class to deliver healthy returns.
How does the Fund work?
The fixed income allocation to the portfolio would be predominantly deployed into securities maturing on or before the maturity of the fund. The strategy would be to buy-and-hold the securities, thereby minimizing any interest rate volatility. Therefore, the fixed income portion of the investment would be largely on an accrual basis.
The equity portfolio exposure would be in equity & equity-related instruments
In case if investments are made in long call options, it would allow investors to participate in the underlying equity market (Nifty), often in multiple times due to the benefits of leverage.
A combination of investments into fixed income instruments and long call option would allow investors to gain from the upside in the equity markets while attempting to limit the loss on the downside.
Who should invest?
Ideal for investors who can lock-in their capital for approx. 36 months or more and seeking equity market returns on the upside bwith an endeavor to minimize losses on the downside.
Source: Content taken from Reliance and UTI Mutual Fund.