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Portfolio Management: Capital Protection Strategy

A 75:25 debt-equity investment strategy ensures no loss of principal, plus returns as well

Even though stock market valuations are high and pose some degree of increased risk, one cannot deny the fact that equity markets are an avenue to earn an attractive return. Can you really invest in the stock market without undertaking any risk? Perhaps, if you structure your investment in a certain way.

First, lets look at the background or the profile of the investor who can consider the avenue. It would be the typical 45-plus investor. If you are one such investor, you are likely to earn a healthy return, but your situation in terms of family responsibilities, loan repayments, possible medical and other future expenses may not always allow you to undertake much risk. So fixed income investing may not leave much in hand after tax. But the risk and volatility associated with potentially higher earning equities may not be thrilling either.

We shall consider for this discussion an investible amount of lakh. The exact amount doesn't matter: it might as well have been `5,000 or `50 lakh -the principle will not change. The figures used are not important; the concept is. If your investment amount is different, invest proportionately.

So, assume you have `5lakh. You want to invest it well, preferably in equity, but with minimal or no capital risk. Let's devise a strategy of investing a lumpsum in equity with no risk.

THE BLUEPRINT

Here's what you do. Out of invest around `3.87 lakh in any five-year bank fixed deposit (FD). Nowadays, FDs are generally offering 7.5 per cent yearly or 5.25 per cent yearly after tax (assuming a 30 per cent rate). Therefore, over five years, 3.87 lakh would grow to `5lakh at the post-tax interest rate of 5.25 per cent per year. So, no matter what happens, five years later, you will receive `5lakh.

However, now you have a lumpsum of `1.13 lakh left over (5lakh minus `3.87 lakh). Invest this `1.13 lakh in an equity mutual fund. Now, investment would have grown to a cool `8.40 lakh. Not only have you protected your capital but benefited from the long-term benefit of equity.

The only caveat: the returns mentioned above are the fund's returns in the past. This may or may not be repeated in the future. However. They aren't allowed to do so by the Securities and Exchange Board of India. The offer document may at best contain a mention that the schemes are oriented towards capital protection with a high degree of certainty but they don't actually guarantee it.

Note that the structure explained in the article, if adopted by the investor, essentially guarantees his capital. There are no 'degrees' of certainty involved, just plain, old, pure certainty. One belief that has stood the test of time - a steady job and a mutual fund

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