Capital Protection Funds – What are capital protection funds?

capital protection funds

Capital Protection Funds are meant to protect the capital of the investor and return at least the amount invested at the time of maturity.  This is achieved by investing the amounts in both debt and equity. While debt portion of the investment along with interest provides capital protection, equity portion provides the possible appreciation from the growth of equities.

After the crash of markets all over the world in 2009, investors become fearful of investing in equities due to heavy losses suffered. Many funds understood that investors were looking for their capital protection and made this an opportunity to start capital protection funds. The main selling point of these capital protection funds is protection of capital and an assurance that even in the worst scenario the capital is protected.

If it was not the marketing efforts, there is no real benefit in most of capital protection funds. There are other proven and cost effective ways of protecting capital along with decent returns which these funds promise. First such avenue that comes to mind when thinking of capital protection is fixed deposit in banks. They offer double digit or near double digit returns with a deposit insurance scheme of upto 1 Lack. One can split their investments into different banks and in different names like wife, children etc to avail complete insurance even if invested amount is more than 1 Lakh (Anyhow, have you heard any psu bank defaulting on the fixed deposits?).

Earlier, it was widely advocated by almost all financial advisers to invest for long term (3-5 years) to benefit from equities. As investors really could  not see any returns in last 3-4 years due to almost flat index, they are looking at capital protection funds as an alternative.

What should be remembered is capital protection funds are highly illiquid  as they are closed end funds. Although, capital protection funds are listed on stock exchanges, trading activity is very low and many times one has to exit these funds at steep discount to prevailing NAV Price.

There are regular open ended mutual funds which offer similar composition these capital protection funds offer. For Example many balanced mutual funds are similar to capital protection funds in their structure. The advantage with the open ended funds is, one can exit at any time at prevailing NAV (Net Asset Price).

If one is very particular about the safety of the return, then one can choose bank fixed deposits, post office certificates and government bonds/notes.  What capital protection funds offer is, a sense of assurance that at least capital is protected even in worst case scenario (On assumption that most of the funds are invested in AAA+ bonds and there is no default risk).

One should understand the disadvantages before choosing Capital Protection Funds. As many alternatives which provide similar or better options do exist, one should consider them too before taking a decision of investing in capital protection funds.

Similar composition of Capital Protection funds can be achieved by investing in fixed deposits and open ended mutual funds like index funds, balanced funds or in large cap funds. While Bank fixed deposits give protection of capital (along with interest accrued) investments in mutual funds give excess return if equity markets perform well.

Depending on the risk one wish to take the composition of debt and equity can be varied. A very conservative investor can do well with 85:15 (Debt: Equity), while little aggressive  can vary the composition to 70:30 (Debt:Equity

capital protection funds available for subscription as on 27 Nov 2012

Scheme NameNFO DatesType / Asset Allocation Pattern
Sundaram Capital Protection Oriented Fund 3 Years – Series 9Nov 16 – Nov 30, 2012A Close Ended Capital Protection Oriented Fund (3 Years)
80-100% Fixed-income securities incl. money market instruments
0-20% Equity and equity related securities
ICICI Prudential Capital Protection Oriented Fund III – Plan A – 36 Months PlanNov 20 – Dec 04, 2012A Close Ended Capital Protection Oriented Fund (36 Months)
80-100% Debt securities and money market instruments
0-20% Equity and equity related securities
ICICI Prudential Capital Protection Oriented Fund III – Plan B – 60 Months PlanNov 20 – Dec 04, 2012A Close Ended Capital Protection Oriented Fund (60 Months)
70-100% Debt securities and money market instruments
0-30% Equity and equity related securities
Birla Sun Life Capital Protection Oriented Fund – Series 14Nov 26 – Dec 10, 2012A Close Ended Capital Protection Oriented Fund (1093 Days)
80-100% Debt and money market securities
0-20% Options premium
Think before you choose your investment in Capital Protection Funds keeping in mind returns they provide, liquidity concerns, fund management fees etc., If you can do the same thing with similar or more safety by choosing bank fixed deposits and open ended mutual funds, why pay fund fees and lock your money till the end of the capital protection fund tenure?

 

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