Skip to main content

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

Popular posts from this blog

Retirement planning from a long-term perspective

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds     `HOW green was my valley'. This title comes from a movie I had watched many years ago. A little boy's journey into adulthood and the story of a Welsh valley's turn of-the-century descent from pristine paradise to despoiled coal mining.   I thought of the title because it is comparatively reflective of a person's life ­ the glorious years when he is earning and the sun down years when he is not having his regular job and, hence, his living standards comes down. The reason is a combination of things. Inflation of food items, transport, increase in health related costs in the later years of life and increase in expenses in almost all basic amenities of life. In India, the social security system is almost non-existent. In some states, wherever it is available, the scales of benefits are extremely modest...

LIC's JEEVAN SHIKHAR

  LIC's Jeevan Shikhar is a participating, non-linked, saving cum protection single premium plan wherein the risk cover is ten times of Tabular Single Premium. The proposer will have an option to choose the Maturity Sum Assured. The premium payable shall depend on the chosen amount of Maturity Sum Assured and age at entry of the life assured. This plan also takes care of liquidity need through its loan facility. The plan will be open for sale for a maximum period of 120 days from the date of launch. 1.   BENEFITS   : a) Death Benefit: On death during first five policy years: Before the date of commencement of risk   :   Refund of Single Premium without interest. Single Premium mentioned above shall not include any extra amount if charged under the policy due to underwriting decision and taxes. After the date of commencement of risk   : "Sum Assured on Death" equal to 10 times the tabular single premium shall be payable. On death after completion of five policy years but b...

Investment Strategy - What is Sector Rotation Theory?

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India)   The economy goes through cycles : it expands for a few years and then contracts. Study of historical data suggests that different sectors tend to perform well on the stock markets during different stages of the economic cycle. While history never repeats itself exactly, some broad patterns tend to recur. Investors can take advantage of the sector rotation theory to move their money from those sectors that have seen their best times to those that are likely to do well in future.   The person who developed the sector rotation theory is Sam Stovall, chief investment strategist at Standard & Poor's. He developed this theory by studying data on economic cycles going as far back as 1854 provided by the National Bureau of Economic Research ( NBER ) of the US.   When trying to correlate stock-market perfor...

Rajiv Gandhi Equity Savings Scheme (RGESS) set for launch this week

The finance ministry is set to notify the Rajiv Gandhi Equity Savings Scheme ( RGESS ) this week.   Though Finance Minister PChidambaram had approved on September 21, the scheme announced in this year's Budget, and had said that the revenue department will notify the scheme and the Securities and Exchange Board of India ( Sebi ) would issue relevant circulars within two weeks, it is yet to become operational.   A senior finance ministry official said the revenue department was expected to notify the scheme any day now to attract retail investors to the equity segment.   He added that Sebi was not required to issue any circular for the operationalisation of the scheme and that after the issuance of the revenue department's notification, investors would be able to avail of the benefits of the scheme.   The official accepted that implementation of the scheme had been delayed due to the deliberations on inclusion of mutual funds ( MF ) in it.   ...

CNX Midcap vs BNP Paribas Midcap Fund

BNP Paribas Midcap Fund - Invest Online   Te  performance of BNP Paribas Midcap Fund  – which has across the last 3 years generated superior returns over the benchmark – especially when the markets have gone down the fund has handsomely outperformed the benchmark preserving the capital of the investors. The fund has been able to do this only due to the superior stock selection process ( BMV approach) that is diligently followed at BNPP.   Highlights of BNP Paribas Mid Cap Fund:   Investment Objective : BNP Paribas Mid Cap Fund gives an investor exposure to invest in the various quality midcap stocks. The fund also has some exposure to large as well as small cap stocks.   Investment Approach : BMV ( Quality and scalability of Business →Good Management → Reasonable Valuation ) with Bottom-up stock picking.   Most of the investors are way happier if the fund that they have invested in is a significant Outperformer in tough times than in Good ti...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now