Capital Protection Oriented Funds
Capital Protection Oriented Funds, what are these funds and how do they work? and does these funds really make sense for an investor to have them in their portfolio.
If you analyse the structuring of a Capital Protection Portfolio or try to under stand how does this really work, then you would understand that the Capital Protection Portfolio Funds are no different from the Typical MIP or hybrid schemes of mutual funds with higher debt exposure.
I would explain this by giving you the example. A typical Capital Protection portfolio is a closed ended scheme of a mutual fund for a minimum of 3 years with about 80% of the portfolio invested in debt / fixed income portfolio. And the rest 20 % gets invested in equity portfolio.
Suppose you have invested Rs 100 in CPP Portfolio. Now the assumption here is that in the current market one can expect about 8-9% return from the debt instruments. So the 80% debt portfolio at 9% would yield Rs 7.20 annually. So in 3 years the debt portfolio would accumulate Rs 21.20. I am not taking into account the compounding factor here. So Rs 80 invested in debt would become Rs 101.20 and hence ensures that the capital is protected. Now the rest of Rs 20 which get invested into equity would determine the return from the portfolio. If equity does well then the investor can expect to make some money home.
However lets compare this with an open ended mutual fund with a similar investment objective in mind. A similar open ended mutual fund would be a monthly income plan.
If we consider exactly the same scenarios as above the chances are that you would end up taking more money home than a capital protection oriented fund. The one simple reason for the same is the expenses debited to the scheme and part of which is also paid as distributor commission to financial advisers. The commission paid in closed ended mutual funds are much higher and so are the expenses charged to the scheme. In a normal scenario, the expenses charged in capital protection fund are almost double of the same charged in an open ended fund. E.g. if in an MIP the expenses charged are 1.25% annually then over 3 years the fund would end up paying 3.75%. Whereas in a capital protection portfolio the same would be to the tune of about 6-7% and hence eating into your returns.
Therefore on a comparable basis, its better to look at an open ended hybrid fund of the similar category than really venturing into a capital protection fund through an NFO.