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If a CPF is a three-year, close-ended scheme, then
redemption of units before maturity will not be allowed.
Assume that an investor puts `10,000 in a CPF, 80% to
85% (`8,000 to `8,500) of this amount will be invested in
a debt paper (three-year AAA-rated corporate paper
yielding around 9%). The balance `1,500 - `2,000 will
be invested in equities.
While `8,000 grows to around `10,200 in three years,
thereby protecting your capital, the `2,000 equity investment
can grow to approximately `3,000, assuming that
returns on equities is at a compounded rate of 15% over a
period of three years. So at the end of three years, the
investor would receive between `13,000 and `13,500.
A CPF today would, therefore, yield a compounded
return of around 9%, post-tax and expenses (1.5%
assumed) in three years. The 8% NSC locks your money
for six years, while the PPF imposes a 15-year lock-in. A
CPF will be rated by a credit rating agency on its investment
structure and the ability to protect capital.
If we take the case of the recently launched Sundaram
Capital Protection Oriented Fund, a three-year closeended
scheme, which invests in AAA-rated high safety
interest bearing bonds and a small portion in equities and
related instruments, we find that this fund seeks to
maximize returns without losing sight of the main
function - capital protection.
Simple capital protection-oriented funds such as these
ensure capital protection by investing a substantial
portion of the corpus in high-quality debt at all points in
time. The debt component is sized in such a way that its
redemption value at the time of maturity of the scheme
will be equal to or greater than the amount invested by
the investors.
The scheme would primarily invest in high-quality
fixed-income securities and it intends to generate capital
appreciation by investing in equity and equity-related
instruments as a secondary objective.
The CPF satisfies the need for an investment avenue
which allows participation in stock markets without the
accompanying qualms of capital erosion. The scheme
will enable investors to benefit from the upside potential
of equity investments without subjecting their capital to
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market-related volatility.
CPFs are hybrid structured products and their ability to
preserve capital is well-suited to current market conditions,
where both debt and equity markets have been
displaying intense volatility. The equity portion of these
kind of funds will be managed in a flexible investment
style designed to take advantage of the opportunities
across the market capitalization range.
However, one disadvantage of CPFs is that these funds
are not sold much by distributors compared to equity
linked saving schemes (ELSS) as they do not have any
direct tax benefit like an ELSS.
Also, the liquidity of these schemes is significantly lower
since investors cannot exit, even with a load, immediately.
They suggest investing that part of the portfolio,
which investors will not require in the next three years.
For example, people wanting to buy an asset after threefour
years can look at this scheme.
Capital protection schemes promise that at least the
minimum amount, which has been invested, will be
returned to the investor irrespective of the movements in
the market over the stipulated period. Besides, the investor
can get a healthy appreciation in case the net asset
value (NAV) of the funds rise by that time.
It is widely known that such mutual funds invest the bulk
of their assets in bonds and debt instruments and the rest
in equities, hoping for some capital appreciation.
Markets regulator, Securities and Exchange Board of
India (SEBI) had said that the mutual fund portfolio,
under the scheme, must be rated by a SEBI-registered
credit rating agency.
However, do not be misled by the name. These are
close-ended products, with a three to five year lock-in
and are illiquid compared to fixed deposits, which offer
overdraft and loan facility against deposits. And, though
the schemes are listed on the stock exchange, they tend to
remain illiquid owing to the lack of trade volumes.
Though a good product for first-time mutual fund investors,
this fund can be a part of every investors’ portfolio
as all of us park some proportion of our savings in
relatively safe investment avenueS.
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