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CPOF Funds - Can Protect Your Principal Amount

 

CPOFs Can Protect Your Principal Amount

 

Capital protection oriented funds allow even risk-averse investors to make gains from bull runs

While investing their hard earned money, most investors think about ways to protect their initial investments. Making profit comes to their mind only after they have protected their starting amount. To address this attitude of a large number of investors who are mostly risk-averse to some extent, fund houses have come out with schemes that try to protect investors' initial investments. These schemes are called Capital Protection-Oriented Funds (CPOFs).

The reason these funds are not called capital protection funds but the word `oriented' is added is because rules governing mutual funds in India do not allow fund houses to float schemes that guarantee investors' initial capital will be protected. Hence, the name capital protection-oriented funds.

 

CPOFs are closed-ended funds in which once you invest, you need to stay invested for the whole duration of the scheme. One of the major advantages for CPOFs is that these schemes allow even the risk-averse investors to participate in the upside of the equity market.

 

These funds are ideal for those investors who are more concerned about protection of their initial investment. So naturally these funds do no create large wealth for the investors. For example, if an investor had invested in a pure equity fund for five years, and got a compounded annual return of 20%, he would have more than doubled his initial corpus during this period. If another investor had invested in a five-year CPOF with 20% exposure to equity , he would get just about 4% annually in the equity part.


Thus overall, the investors' return would be limited to about 22% over the same period of time on his/her total investment. In the first instance, if the equity market had given a negative return, the investor's total investment could have turned negative as well. However, for the second investor who invested in the CPOF, his/her investments will not be negative and is sure to get back his/her initial corpus.

The fund managers of CPOFs usually invest their corpus in government securities and other highly rated debt papers. They also deal in the equity derivatives market for full exposure in the equity market.


Through the derivatives market, paying a margin, they leverage their positions to get a higher exposure and give superior returns to their investors from equity market. Some even invest part of their corpus in frontline stocks.


An alternative: MIPs/hybrid funds An alternative to CPOFs are the monthly income plans (MIPs), which also, mostly , protect investors' money but there is no unofficial guarantee that the initial investments will be protected. In MIPs, the fund manager in vests the money in such a way that he/ she is able to distribute some profits to investors on a regular basis, preferably on a monthly basis.


Here, according to an investor's risk taking ability, one can select either a debt-oriented MIP or an equity-oriented MIP .

Another category of fund for risk averse investors is the hybrid funds.
These are schemes for those investors who are not very sure whether to invest in debt or equity, but are surely looking to not lose their hard-earned m o n e y. H y b r i d schemes are those that invest part of their money in debt and part in equity. Here, the ratio of debt to equity may vary over time and, depending on the same, the taxation structure also varies.

A few years ago, some fund houses also launched hybrid funds that invested in gold. But such funds were launched to capture the bull run in the yellow metal and, with the gold rally now subdued, debt-equity-gold oriented hybrid funds are not taking off any more.

Some financial planners are also of the opinion that even individual investors can replicate CPOFs in their own portfolio. However, if you are not experienced enough to have a portfolio that can protect your investments, it's better to take the mutual fund route where, for a small fee, experienced fund managers would do the job for you.

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