Skip to main content

Are capital protection funds better than FDs?

Equity is considered the best asset class to go with in inflationary times, as they have given positive inflation-adjusted returns over a longer period

INVESTORS have witnessed uncertainty and volatility in financial markets over the past two years. The global financial crisis induced a sense of risk aversion among most investors. While many have shifted to safe haven assets like gold and silver, others have relied on bank deposits to protect and grow their hard-earned money.

With interest rates showing an upward trend, fixed deposits now offer a much envied blend of safety and competitive returns. But then, there is a chink in the armour, inflation! With food inflation ruling in double digits, although bank fixed deposits are close to offering interest rates in double digits, they may still fail to beat inflation and end up generating negative returns on your deposits.

Equity is considered the best asset class to go with in inflationary times, as they have given positive inflation-adjusted returns over a longer period. While there is no shying away from the fact that volatility persists in the equities market, the right style and approach of investing is crucial in order to achieve long-term gains. This is where the need arises for a product that can offer both the safety of fixed income and capital appreciation similar to equities.
Capital protection-oriented funds are conceived with this objective of providing capital protection and ensuring growth in a single product.

These are close-ended debt-oriented mutual fund schemes that invest in a mix of fixed income instruments and equities. The tenure of such schemes ranges from two to five years.

These funds achieve the purpose of capital protection by way of fixed income allocation, as they follow a passive style of investment.
They invest in the highest rated debt instruments, which mature on or before the maturity of the scheme and investments are made in such a fashion that the final maturity value of the fixed income investments is equal to or greater than the principal of the scheme.

The share of fixed income out of the total portfolio is decided on the basis of the prevalent interest rate. The rest is invested in equities. This performs the role of alpha generator in the portfolio.

A simple illustration can explain the concept more clearly. Suppose an investor buys units worth Rs 10,000. Assuming the fund generates nine per cent yield on the fixed income portion, it will require Rs 7,700 to earn Rs 10,000 in three years and thus protect the investor's capital.

This leaves out Rs 2,300, which is to be invested in the equities market for potential upside participation. Assuming that the investment in equities appreciates at a rate of 25 per cent, the total returns on the principal investment will be approximately 13 per cent. On the other hand, if the market corrects 10 per cent, still the total return on the principal investment will be approximately 5.25 per cent.

Are these funds better than bank FDs?

Capital protection-oriented funds provide
a credible portfolio solution in an inflationary environment by combining the concept of `capital protection' with that of `capital growth' within a single fund. While the fixed income portion protects the capital, the equity portion gains from the India growth story. A longer investment horizon (say two to five years) compliments the equity returns in the portfolio.

Historical data (between 1991 and 2010) shows equities have delivered positive return in 80 per cent times over a three-year horizon while in a one-year time horizon, investors have received positive returns in 65 per cent of times.

Also, the recent correction in the equities market can be looked at as an excellent opportunity to build this kind of a portfolio. In terms of taxation too, capital protection-oriented funds provide a tax-efficient solution. If held more than a year under the growth option, an investor will pay 10 per cent tax without indexation and 20 per cent with indexation; whereas in case of fixed deposits, the returns are taxed according to the marginal tax bracket (30 per cent in case of the highest tax bracket). However, it is best to consult a tax advisor before taking a call on this aspect.

In our view, capital protection-oriented funds are appropriate for investors seeking to gain from equity participation without any risk of erosion in the capital invested.

 

Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

What is Financial Freedom?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)     There were many things common between our Freedom fighters. All had the Single vision (Free India), common goal (independence) and had a disciplined and focused approach. They were ready to do anything and everything and had made so many sacrifices to see India free . But the road to freedom was not easy .They had faced lot many hardships, went to jail so many times and even confronted physical and mental torture from the British. There was one more thing which proved to be an advantage to our fighters that most of them were professional lawyers. The knowledge of legal issues and its impact on our country at large has helped them counter various bills and proposed new laws by the then government. It is due to their continuous effort that we are able to achieve the goal of Independent Indi...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...
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