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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

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