THERE is nervousness in the air in Dalal Street. With the market hovering near the historical high, investors are looking for some sort of safety net. Sure, they want to be in the stock market, but not at the cost of their capital — something that may sound almost impossible in the midst of ongoing volatility. But that's not quite true. Today, there are several options available that help investors to stay invested in the market and at the same time offer protection to their capital.
Short 'N' Sweet:
The simplest way to go is to invest in a high-quality instrument that will pay you a fixed rate of interest and invest the interest earned in stocks. For example, you can invest your capital in a postal monthly income plan and invest the monthly interest in a good diversified equity mutual fund with a long-term track record, using a systematic investment plan (SIP). This strategy will save your capital from being exposed to the vagaries of the stock market. On top of it, since you will invest in stocks in a phased manner you will also avoid the timing risk. You can also transfer the appreciation enjoyed in your 'emergency funds' invested in liquid funds into equity fund using the systematic transfer plan.
Smart Combo:
You can also go for a fixed income instrument and equity combo. First, calculate the amount of your total corpus that needs to be invested in fixed-income instruments, so that the money grows over a period of time at a given rate of interest over the total amount of money you had at the beginning of the exercise.
For example, if you come across a fixed-income instrument offering 8% interest with nil or the least possibility of default, invest 80% of your money in such an instrument. Suppose you have 1 lakh to start with. If you invest 80,000 (or 80% of 1 lakh) in an instrument that will pay you 8% per annum for three years, you will have approximately 1 lakh at the end of the term. In a way, you are assured of your capital at the end of the third year. After investing 80% of your money in a safe fixed income instrument, you can then put the rest of your money (20,000 in this case) into shares or invest in a diversified equity fund or an index fund. If your equity investments double over three years, you stand to make 1.4 lakh. Even if you lose your entire capital invested in equities — which is a remote possibility — rest assured that you will get your capital ( 1 lakh in this case) back.
But if you are still not comfortable investing in stocks, you can consider going for a systematic investment plan (SIP). And if you are someone who does not mind taking on a bit of risk, then you can also consider investing your fixed-income component into a fixed maturity plan (FMP) with a three-year maturity, to boost your post-tax returns.
A Capital Idea:
A capital protection-oriented fund is a closed-ended debt mutual fund. The mutual fund invests a part of your money in high quality fixed income instruments to ensure the safety of the amount invested by you. The rest of the money is invested in equity with the sole objective to enhance returns.
A low-risk appetite investor can look at this product, with an expectation to earn returns in excess of a fixed deposit of similar tenure.
But remember, the fund does not guarantee your capital. In extreme situations, if there is a default on the papers held by the fund, you may land in trouble. So, it's better to stick to offerings from fund houses with a good track record.
Since it's a closed-ended fund, the fund house cannot redeem your money before maturity. Though the units are listed on stock ex-changes, they are rarely traded. You may either not get an exit on the stock exchange midway, or you may have to exit at a value much lower than the net asset value of the unit. These instruments enjoy the tax benefits offered by a debt mutual fund, allowing you to avail of the indexation benefit.
Special Packages:
According to Karvy Private Wealth's India Wealth Report, the total assets invested in equity-linked debentures stood at 15,000 crore as on November 18, 2009. They offer returns in sync with returns generated by underlying stock index or a stock. You are offered higher of the fixed coupon and the returns generated by the underlying. There are two versions of structured products — one that offers a capital protection and another that does not. Risk-averse investors can look at the former. "Investors should have a clear idea of the benchmark used in the structure and the participation ratio offered before investing in a structured product. When you plan to invest in the broad market, you should not invest in a structured product that has a sectoral benchmark such as Bank Nifty.
In the past, investors have seen poor real returns offered by structured products due to low participation ratios. The minimum ticket size is a tad higher and typically stands above 10 lakh. Private banking channels and wealth managers offer these instruments. In most cases, you can exit only on the date of redemption.
Though monthly income plans offer a less risky way of investing into equity, they focus more on offering regular returns than protecting capital. Though some unit-linked insurance plans (Ulips) offer guaranteed returns, they require you to remain invested for a much longer term. Some of them only guarantee the first premium and do not protect all the premiums paid throughout the term of the plan. Given the high costs associated with Ulips and the mortality charges paid to-wards the insurance, they are not a great investment option for capital protection-oriented investor who otherwise is not interested in insurance.
If you have a long-term horizon in mind, instead of worrying about capital protection, stick to your asset allocation while investing.
Time is the best guarantor and creator of wealth, if you stick to quality companies.
