Things to take note of in capital protection Murual Funds

 

LOOK around and there is a mutual fund for all kind of investors' need. When it comes to the question of safety of capital there are capital protection funds that now operate in the country.

The funds provide for protection on the downside, along with the possibility of some gain in case of favourable conditions in the equity market.

While these funds provide an element of comfort for investors, there are a few things that need to be considered: Inflation effect: The first thing that the investor has to consider is the inflation effect. This is necessary because there is a time gap since the initial investment actually took place and when the fund will return the money. This can be a period of 3 years or even 5 years.

During the interim period inflation could impact the purchasing power. This is the reason that the investment return has to at least take care of the inflation effect so that the purchasing power of the individual remains the same.

What this means is that if the fund returns just the Rs 10,000 capital of the investor after three years saying that the capital is protected, the investor still loses out because there is a lesser amount of goods and services that can be bought with the same amount of funds.

Capital protection in absolute terms does not take care of the inflation effect so this need to be considered for determining returns.

Beyond capital safety: Just ensuring the safety of the capital is not enough. This is because of the fact that there are several other options where there can actually be some earning along with the safety of the capital. The individual has to understand that if there is merely the return of the capital then it is of no use.

Even an amount lying in the savings bank account earns 3.5 per cent while other debt options would earn higher. All these other options including bonds as well as deposits are competing for the same money of the individual.

Matching returns: When the investor looks at the returns from the capital protection funds they should not consider these in relation to just the return of the capital.

There are significant returns that are available from several debt options like fixed deposits or even small savings investments. Several post office options are in the 8 per cent range while bank fixed deposits earn in the range of 8.5 per cent to 9.5 per cent at present.

 

This actually represents the amount of the earnings that are available for the individual if they do not take any risk and then park their money into these safe instruments. The capital protection options from the mutual funds are actually competing against these areas and the right comparison is required for the purpose of determining the proper selection.

Balanced portfolio: The individual also has to ensure that they are looking at the balanced portfolio angle when they are considering the situation of a capital protection fund.

This happens because there is debt as well as equity present in the investment and hence there are features of both of these when the investment is considered as a whole.

When an individual wants to see what they can actually do on their own then they need to construct a portfolio that is of a similar nature with a similar kind of weightage so as to get the right picture.