Capital protected funds as the name suggest this funds will help investor to protect their capital but there is no guarantee of it. The scheme is very much suitable for risk averse investor who are shy of losing money but wants to participate in risky markets such as equity. Scheme generates somewhat better return compare to other debt fund like FMP, bank’s FD and PPF.
Scheme is closed ended one, which means that subscription is open only during the new fund offer (NFO) period and after that, there would not be any fresh subscription or redemptions from the fund. If investor wants to do redemption before maturity than he will receive the current value of investment and also have to pay huge exit load.
Scheme apart from protecting capital by investing in debt market, it also has an exposure towards more risky equity market. The allocation in between Debt and Equity is based on the yield which bonds can generate until the tenure of the scheme.
The regulator mandates that all Capital Protected Fund must be rated by a credit rating agency. The rating will give investor an idea about the capability of fund to meet its capital protection objective. The top rating for capital-protection funds is AAA, indicating the highest degree of certainty regarding timely payment of the principal on maturity.
The regulator also mandate the fund that its debt component should grow to the initial amount invested (i.e. the principal amount) over the tenor of the scheme.
Let say the fund is supposed to carry only AAA rated debt securities and as per the yield available on AAA rated, 80% of the portfolio would be enough to grow to the principal amount, net of fund management expenses over the tenor, say three years. This would leave 20% of the portfolio free for the equity component. Which will help the fund to participate is the growth of the equity market and in case the equity market tumbles the debt component will guard the initial amount invested.
How it works
Let’s suppose fund of Rs 100 is to be invested in capital protected fund for tenure of 1 year. Bond in which the fund manager decides to invest will yield 10%. In order to protect capital, fund manager needs to invest Rs 90.09 in bonds which will yield 10% as after 1 year Rs 90.09 will become Rs 100 which will protect the capital.
Now Rs 9.09 will be invested in equity market to generate more return. If it grows by 20% to Rs 10.90 then total value of the investment will be Rs 110.91 which means net return generated by the portfolio is 10.9%. In case equity allocation declines by 30% to Rs 6.36 then total value of the investment will be Rs 106.36 which means net return of the portfolio will be 6.36%.
Who gets the benefit?
If you are a kind of investor who expect 40%-50% yearly return on their investment then certainly Capital protected Fund is not a type of investment which will attract your attention. But on the other hand if you are concerned about your initial amount and want to earn better return than bank’s FD, and FMP than you should consider this as a part of your investment portfolio.
Investor who has a specified goal and wants to accumulate funds for that, then capital protected fund can be very helpful as it will help to generate better return with capital being protected.