Skip to main content

Risk-averse investors can fancy Capital Protection Funds

THE term ‘risk’ is slowly finding its way back into investor lexicon. This is evident from the rising demand for capital-protection products offered by brokerage houses in their portfolio management schemes (PMS). Of several such products, the one which uses bonds and the recently introduced long-dated options, is the most sought after for now.


What differentiates this capital-protection product from others is the use of long-dated options, that Sebi introduced in January this year. The product has been structured in such a way that a major chunk of an investor’s capital is put into highly-rated bonds, while the rest is used to buy Nifty call options, which expire 1-3 years from now.


So, for instance, if a client puts in Rs 100 into such a product, the fund manager of the PMS would invest, say, Rs 90 in bonds at a fixed interest rate to protect the capital. Rest of the money is used to buy (pay the premium for) a long-dated Nifty call or put that expire in 2009, 2010 or 2011.


It is learnt that majority of fund managers are buying long-dated Nifty calls, mostly in 2011, an indication that they expect the bull rally to resume by 2011. When an investor buys a call option, he expects the market to rise. The advantage of buying options is that the risk of losing money is limited to the premium paid.


By using long-dated options, an investor takes a longer-term bet on the direction of the market, which helps him ignore short-term losses. Here, the investor does not need to roll over his positions every month or quarter, thereby saving on rollover costs.


The gaining acceptance of this capital-protection product is driving activity in long-dated options. Industry officials said PMS arms of ICICI Prudential Asset Management, Kotak Securities PMS and Emkay Shares and Stockbrokers are among the few, which are offering such products. This could not be individually verified with these players. But, some in the industry said the existing market conditions have made it difficult for them to sell this product to potential clients.


When we approach clients with such a product, the product is designed in such a way to suit market conditions at this moment. When the client finally approves to buy it, the situation might have changed

Popular posts from this blog

Equity investors should track market developments

The stock markets have been volatile over the last few days. They are in a sideways movement and trying to find the bottom after a fall of 20 percent a week ago. The market sentiments are not very positive at the moment and the recent developments are expected to dampen them further. Globally, governments and central banks are trying to cut rates and announce packages to improve business sentiments. These are some of the major developments in the markets last few month: A) Global On the global front, another large US bank went into a financial crisis. The US government took quick measures to avoid the spread negative sentiments in the markets. The US government announced a bail-out package and agreed to shoulder the losses on the bank's risky assets. China announced a large cut in interest rates and reserve ratio to boost the investor sentiments in the markets. Recently, the World Bank announced China's growth rate next year will come down to 7.5 percent. The European ...

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...

Gold: It is safe & secure

RETURNS ON GOLD & ITS ETF’s RISE WHILE most of the popular asset classes are going through bad times, the yellow metal shines on. In fact, in the last one year, gold has given a return of more than 25% and currently trades at Rs 14,695 per 10 gm. Even gold exchange traded funds ( ETFs ) have appreciated substantially. Gold Gold Benchmark Exchange Traded Scheme ( BeES ) and Kotak Gold ETF have given more than 25% returns each in the last three months. Even as the equity markets have taken a hit with the Sensex losing around 46% in the last one year and real estate prices also witness a correction, investors’ preference has shifted to safe havens such as gold. On an average, most of the diversified equity mutual funds have fallen and real estate developers are offering discounts. Thus gold remains the safest bet. The appreciation in the gold prices is mainly due to its safe haven status. The key reason for gold to go up is lack of other investment opportunity. There is also a risk in...

Alpha - The relative performance

Alpha, the net performance of a component against the benchmark is an overlooked tool   Absolutely speaking, any bounce back now on markets should be the last for the year. We offcourse can be wrong and prefer to be judged on alpha (relative performance) as relative accountability is fine with us. According to Alpha India, the top outperformers in the weeks ahead should be Reliance Communications, Reliance Infrastructure, SBI, HDFC, ONGC, Larsen, Jaiprakash Associates, Maruti, Bharti and DLF. On the short side (reduce side), we have Ranbaxy, ACC, Sail, Tata Steel, Wipro, Tata Motors, Sun Pharma, TCS, M&M and Infosys.   Performance like everything follows the 80-20 rule, 80 per cent of your gains are going to come from 20 per cent of your portfolio. So why not give it a thought? The importance of alpha If alpha was so important, then why don ' t newspapers and websites publish it? Why alpha gets featured annually but not as intraday or daily event? Why don ' t we c...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now