29 January 2016

Capital Protection Schemes offered by Mutual Funds

  
1. What are capital protection oriented schemes?

Capital Protection Oriented Schemes (CPOS) from mutual funds are closeended schemes with a tenure of three to five years and are low risk products. Typically, they are hybrid schemes with majority of the portfolio invested in debt/ money market instruments and the balance in equity and equity-related instruments. These schemes are oriented towards capital protection and do not offer guaranteed returns. The orientation towards protection of the capital originates from the portfolio structure of the scheme.

2. How will capital protection work in a mutual fund? 

In such a scheme, the allocation to debt instruments is done in such a way that at the end of the term of CPOS, the value of the investment grows to the original investment in the fund. The equity portion aims to add to the returns of CPOS at maturity. The equity component is generally invested in equities for capital appreciation. The debt portion is invested in commercial papers, certificates of deposits, bonds and nonconvertible debentures that will mature along with the maturity of the fund. Assuming the scheme invests approximately 80 per cent of your capital of say `100 in highest rated debt and money market instruments. The debt portfolio will grow over the tenure of the scheme to 100 per cent, thereby protecting your capital. The remaining 20 per cent will be invested in equities or futures and options strategies. So at the end of the tenure, the debt portion appreciates to `100 and the equity portion appreciates to Rs 40, the investor will get Rs 140 back. In case the equity portion, dips to Rs 10, the investor would get Rs 110 back. In both the cases, the capital of Rs 100 is protected.

3. Who can invest in capital protection schemes?

These schemes are suitable for various types of investors. Typically investors who want equity exposure with stability in the portfolio being provided by the debt portion of the portfolio. Investors with a low risk appetite, and who do not want to take interest rate risk and want to earn prevailing yields over the tenure of the scheme. Finally, investors whose investment horizon matches with the tenure of CPOS.

4. Can an investor redeem units of CPOS before its maturity?

As these are close-ended schemes which mature at a predetermined date, investors cannot redeem the units before maturity. from the fund house However, the units are also listed on the stock exchange and the only redemption option available is a sale on the exchange.