A capital protection fund is a mutual fund scheme which has a portfolio comprising of both debt and equity investments. While 83%-88% comprises of debt instruments, 13%-17% comprises of equity related investments. Although the scheme seeks to protect the capital invested, the returns are not very attractive and thus it can be avoided.
It is a close-ended capital protection oriented income scheme with tenure of 36 months. The scheme will have a portfolio mix of highest rated debt and money market instruments along with the exposure to equity. On one hand these kinds of funds are ideal for capital protection during a downturn; on the other hand, it does not help much in creating wealth for investors. One of the best features of capital-protection-oriented MFs is that it enables risk-averse investors to gain exposure to equities.
Investment objective / Strategy
The scheme is made to generate returns by investing in a portfolio of debt and money market instruments which mature on or before the date of maturity of the scheme. The scheme also seeks to invest a portion of the portfolio in equity and related instruments to achieve capital appreciation. By having a portion of equity in the portfolio, the fund will also generate returns in good times.
Debt portion – 83% - 88%
Equity portion – 12% -17%
The debt portion of 83% of the invested capital will grow over the tenure of the scheme approximately to 100% thereby protecting your capital and rest 17% will be invested in equities which will provide upside in the portfolio. However, if one reads the Scheme Document, it is clearly written that there is no assurance that the investment objective of the scheme will be realised.
Should you invest in this scheme??
As you can see from the illustration above, if you invest in this scheme and get 0% returns on equity then the value of Rs.100 invested at the end of 3 years would be Rs.117/-, thus generating a CAGR of 5.37% only.
Now if you go by the name “Capital Protection”, the scheme must generate returns equal to the inflation rate prevailing in the economy. If you get back less than what inflation is, then you have actually lost the value of your capital. Even if you keep Rs.100 in a bank FD for 3 years at the prevailing risk free interest rate of 8.5%, you will still get back Rs.127. Today, the minimum expectation of an investor is to get bank FD interest rate and not less than that. So it is better to form your own strategy and protect your capital rather than paying high management cost to a MF company and get back minimum out of that.
So to conclude, it's better to avoid Capital Protection Funds as the features of the scheme are not very attractive and the same can be done with the help of your Investment advisor or Financial Planner.