The uncertainties associated with stock market have kept many a retail investor out of it.
THERE are many investors who after witnessing sensational stock market crashes in the past have a mortal fear of investing in equities. However, with returns from traditional fixed income products turning unattractive, investing in equities is perhaps the only way to beat inflation. In such a scenario, what are the choices that such an investor has? Fund managers have come out with innovative schemes as the answer to the dilemmas faced by such investors.
CAPITAL PROTECTION STRATEGY
If you desire better return on capital and at the same time you are concerned about the return of capital, this is the scheme for you. These are close-ended debt mutual funds. The fund invests a part of your subscription into high-quality fixed income instruments that by the end of the term of the scheme reaches at least the original sum. Rest of the money is invested in equity with the sole objective to enhance returns. However, one must remember that such products are generally illiquid and one may have to remain invested for the full tenure of the product to reap its benefits. For example, if you invest Rs 1 lakh in such a scheme with 3-year tenure, the fund manager will put approximately Rs 85,000 in fixed income instruments which will grow to Rs 1 lakh. The rest of the money, Rs 15,000, will be invested in equities. Rs 85,000 invested in debt for a period of 3 years will give you interest income sufficient to protect your capital while extra returns could come in from equities. "Capital protection-oriented funds are the best option for a fixed income investor who are considering investing in equities for the first time," Kenneth Andrade, head, investments, IDFC Mutual fund, says.
STRUCTURED PRODUCTS
Over the past couple of years, structured products have guaranteed success of your capital in the market. Investors in such schemes can get to earn a return linked to the returns generated by underlying stock index or a stock. You are offered higher part of the fixed coupon and the returns generated by the underlying. There are two versions of products, one that offers a capital protection and another that does not. Risk-averse investors can look at the former. However, a point to note is the minimum ticket size is a tad higher and typically stands above Rs 20 lakh. The products are available only through the private banking channels that cater to high net worth individuals.
MONTHLY INCOME PLANS
Monthly Income Plans (MIPs) launched by mutual funds deploy money into a mix of equities and fixed income instruments. The only difference between an MIP and balanced fund is that in the case of MIP, the fixed income weight is higher. In some cases, it is as high as 95%. If you are risk averse go with a fund with higher debt allocation. For those who can digest a bit higher volatility, you can consider investing into an MIP with approximately 25% equity. MIPs though are aimed to generate regular returns that take care of income needs, there is no guarantee that there will be regular payouts to the investors. Investors run the risk of losing money. However, they are ideal vehicle for those who are keen to taste the waters, but do not intend to risk most of their capital. MIPs work better than capital-oriented products for investors with a 3-year time frame, since the fund manager has the flexibility to alter the duration of the portfolio depending on the interest rate scenario
COMBINATION OF DEBT AND EQUITY FUNDS
If you are willing to take some efforts, you can choose to invest into a combination of equity and debt funds. Depending on your risk appetite, you may choose to put 10-20% of your money into equity funds. This helps you ensure you will earn good risk-adjusted returns over three to five years.
MAKING A SMART CHOICE
SCHEME: CAPITAL PROTECTION
Time frame: Generally 3 years
LIQUIDITY: Low
INVESTMENT AMOUNT: Can start with as low as Rs 5,000
FOR WHOM: Fixed deposit investors
AVAILABLE OPTIONS: IDFC Capital Protection Oriented plan
SCHEME: STRUCTURED PRODUCTS
TIME FRAME: One year to 3 years
LIQUIDITY: Low
INVESTMENT AMOUNT: Meant for HNI clients, as you need to commit Rs 20 lakh
FOR WHOM: Fixed deposit investors
AVAILABLE OPTIONS: These products are tailor-made as and when the need arises by private bankers for their clients. For example, BNP Paribas Wealth Mgmt is currently offering 2 structured products with principal protection. The first one with a tenure of 3 years gives you a minimum coupon of 14% plus 40% Nifty participation. The second one has zero coupon, but gives you a participation of 90% in Nifty performance.
SCHEME: MONTHLY INCOME PLANS
TIME FRAME: Open-ended
LIQUIDITY: Very liquid
INVESTMENT AMOUNT:
Can start with as low as Rs 5,000
FOR WHOM: Those who want a regular income
AVAILABLE OPTIONS:
Birla MIP II Savings 5, Canara Robeco MIP, L&T MIP and Reliance MIP have been
SCHEME: COMBINATION OF DEBT AND EQUITY
TIME FRAME: Open-ended
LIQUIDITY: Very liquid
INVESTMENT AMOUNT: Can start with as low as Rs 5,000
FOR WHOM: For low-risk investors with a 3-year time frame
AVAILABLE OPTIONS: Equity funds with a long-standing proven track record and rated 5 star by Value Research such as Birla Sunlife Frontline Equity Plan A, DSPBR Equity, HDFC Top 200. Income funds are Birla Sunlife Dynamic Bond Fund and Canara Robeco Income Fund and ICICI Prudential Income Opportunities Fund
