Should you opt for Capital Protection Funds?
Capital projection funds main objective is to safeguard the capital along with providing good returns. Should you invest in capital protection mutual funds? When should you invest in such capital protection funds?
Investors looking for capital protection
When equity markets see no direction, it is very difficult for investors to predict the future. Investors are worried about the high volatility in stock markets. Under such uncertain conditions, instead of getting good returns, there is every chance that your capital may get eroded. Capital protection funds aims to protect you investments.
What are Capital Protection Funds?
Capital protection funds main objective is to seek capital protection by investing in fixed income securities maturing with the tenure of the scheme and seeking capital appreciation by investing in equity related instruments.
Features of Capital Protection Funds
- Capital protection is the main objective: Main objective of these funds are capital protection. These funds invest 75% to 80% in debt related instruments and balance in equity related instruments.
- Close ended funds: These are close ended funds which gets matured during 1, 3 and 5 years time frame.
- Low effect of equity markets performance: Since these funds invest small portion in equity markets, the performance of stock market is not impacted much.
How do the capital protection funds work?
Let me explain this with an example. If we invest say Rs 1,000 in capital protection funds. With its investment objective, it may invest Rs 800 in debt related fixed income options and Rs 200 in equity related instruments. Let us assume that debt instruments generate a return of 25% in 3 year time frame and equity markets generate 15% returns in 3 years time.
- Investment of Rs 800 turned to Rs 1,000 @ 25% total return in 3 years
- Investment of Rs 200 turned to Rs 230 @ 15% total return in 3 years
- Total investment of Rs 1,000 turned to Rs 1,230 after 3 years which works out to be a total of 23% returns.
Low Returns: The returns in the last 2-3 years are between 6% to 7% p.a. only. Any other safe investment option like bank fixed deposit gives around 8% to 9% p.a. return.
Negative real returns: When inflation is high, capital protection funds may provide negative real returns means, the returns are low comparing to inflation rate.
Liquidity issues: Capital protection funds are close ended funds. Means they cannot be exited before the maturity period. However they can be sold in stock exchanges but at discounted value.
Debt mutual funds Vs Capital Protection Mutual Funds
Debt mutual funds invest money in debt related instruments. It could be any fixed income options, government securities, and corporate deposits etc., However capital protection funds main objective is protection of capital, hence it invests only in secured fixed income options. The returns from such secured fixed income options are low comparing to other fixed income options. Debt mutual funds would rank high comparing to capital protection funds in terms of returns.
Conclusion: Thought Capital protection funds objectives are met, the returns on such funds are low comparing to other safe investment options. Instead of looking for capital protection funds, you can look at other safe investment options like debt mutual funds, bank fixed deposits etc. where you get good returns over medium to long term.
If you enjoyed this article, share the link in Facebook/Twitter. The links are provided below.
Should you opt for Capital Protection Funds