What is portfolio capital protection?
The portfolio of capital protection funds is made up of a mix of stock and debt, with debt accounting for the majority of the investment, notably zero-coupon debt and equities accounting for only a minor portion of the portfolio.
The debt portfolio’s maturity and the funds’ lock-in term are both linked, further protecting it against interest rate fluctuations. Because these debt instruments are kept until maturity, there is no risk of interest rate fluctuation-related market-to-market losses. Closed-ended funds with a period of one, three, or five years provide a cautious investment alternative.
Where do capital protection funds put their money?
Capital protection funds, as the name implies, invest carefully in fixed income and equity choices. These are closed-ended hybrid mutual fund schemes that place a strong emphasis on debt to protect capital.
The bond yield and the scheme’s term are usually used to determine how much equity and debt should be allocated. The majority of the money is put in high-rated fixed-income securities to receive guaranteed returns, while the rest is placed in equity to gain further gains.
The fund’s approach asserts that the debt proportion is planned in such a way that the returns equal the value of the initial capital invested.
Capital protection funds typically invest a large portion of their assets, roughly 80% of total assets, in highly secure debt instruments such as AAA-rated bonds. The remaining 20% of the money is put into significantly riskier investments like stocks.
The fund’s design ensures that the principal amount is preserved, regardless of how the equities market performs during economic downturns.
Let’s look at an example to help us understand better.
Suppose, capital protection funds have an investment corpus of ₹1,00,000. It invests approximately ₹91,740 in debt instruments with a yield of 9% for one year. This ensures that the maturity value of the debt investment becomes ₹1,00,000.
The remaining amount of ₹8,260 is invested in equity. At the end of the tenure, the capital remains intact, and the growth of the equity investment is the gain.
Why are Capital Protection Funds preferable over fixed deposits?
If capital protection is the primary goal, capital protection funds are considerably superior to FDs. When compared to other pure fixed-income havens like fixed maturity plans, these funds tend to give higher post-tax returns.
Who should put their money into a Capital Protection Fund?
These hybrid funds are best suited for risk-averse, new or first-time investors, as well as those who have experience investing in individual equity alternatives. Investing in capital protection funds is also a fantastic approach to get equity investing experience.
The disadvantage of investing in capital protection funds is that their returns are limited, and unlike open-ended debt funds, the lock-in period prevents investors from exiting before the maturity date.
As a result, it is perfect for individuals who wish to invest for the long term. In the event of a drop in interest rates, there is no room for capital appreciation.
Are Capital Protection Funds’ returns guaranteed?
It’s crucial to keep in mind that capital protection isn’t a guarantee. Government bonds, bank fixed deposits, and post office savings accounts are all debt products that guarantee returns based on an institutional cover.
These schemes, on the other hand, provide capital protection through optimizing portfolio structure.
What factors should you consider while selecting a Capital Protection Fund?
Your investing objectives, risk appetite, and liquidity requirements should all be considered when selecting a scheme. Before choosing a capital protection fund, keep the following factors in mind:
Examine the investment aim carefully to confirm that the scheme aims to invest in the manner that you prefer.
Capital protection-oriented schemes are evaluated by Credit Rating Information Services of India Limited (CRISIL) based on the likelihood of the portfolio value dropping below the previously contracted initial value and/or investors receiving their money back in full. Examine the CRISIL rating or the specific scheme.
The scheme’s duration should fit to your investment horizon.
The asset allocation is the most essential factor.
Keep in mind that the return on your investment is directly proportional to the risks you’re taking. The greater the risk, the greater the reward, and vice versa.
A Capital Protection Oriented Fund’s goal is to protect your money while also allowing you to generate returns by investing a portion of the fund’s assets in the stock market. Look for programs that clearly state their investing goal.
If you’re unsure, contact one of our financial professionals at MyGoalMySip today to determine the appropriate plan for you.
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