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.
