Five fund houses have come out with capital protection funds recently and two more are awaiting SEBI’s approval.
Funds like Birla Sun Life Capital Protection Oriented Fund - Series 16, Canara Robeco Capital Protection Oriented Fund– Series 2 (Plan A), ICICI Prudential Capital Protection Oriented Fund IV - PLAN E - 36 Months, HDFC CPO - I - 36M October 2013, BOI Axa Capital Protection Fund Series 1 are open for subscription currently. Most of them are three year tenured funds.
Union KBC and Sundaram Mutual Fund have sought SEBI approval to launch capital protection funds.
Despite attractive commissions offered by fund houses, IFAs are not keen to recommend capital protection funds to their clients. These are high margin products for AMCs as the fund can charge an expense ratio up to 2.75 %. This gives leeway to AMCs to offer better commissions to distributors. According to distributors, fund houses are offering anywhere between 3% to 4% upfront commission on these funds.
Capital protection funds are typically close end which are listed on the exchanges post NFO. Benchmarked against CRISIL MIP Blended Fund Index, they aim to protect capital by investing up to 80% in fixed income securities maturing on or before the tenure of the scheme. A small portion of assets (up to 20%) is invested in equity. The fixed income corpus invests in money market instruments like CDs, CPs, treasury bills and the balance is invested in equity derivatives which is used as a hedging strategy. The portfolios are disclosed twice in a year. The returns from capital protection funds could be hard to predict as the capital appreciation is completely dependent on equity markets performance.
“The upside in options is better as compared to investing in cash market. We invest 85% of the corpus in papers which have highest rating. The fixed income portion aims to provide safety of capital while the equity portion provides a return kicker. The fund’s performance could be limited if equity markets don’t perform well. Capital protection funds have become quite popular among retail investors,” said G Pradeepkumar, CEO, Union KBC Mutual Fund.
However, some advisors are not keen on selling capital protection funds at this juncture as there is still uncertainty on how equity markets will pan out.
“It is better to invest in an open end equity fund through SIP and separately in a debt fund instead of investing in a capital protection fund. Distributors are becoming wary of selling products which offer high commission as clients perceive that they are being mis-sold if they come to know about commissions,” said a Mumbai based financial planner on the condition of anonymity.
Nisreen Mamaji of Moneyworks said “Investing in capital protection funds means that you are taking a small step towards equities. It is better to split your investments between a purely debt and equity fund.”
Industry experts say that a large section of IFAs typically don’t recommend capital protection funds. “These funds are essentially made for bank distributors. IFAs normally don’t sell them,” said a Mumbai based IFA.
Brijesh Damodaran of Zeus Wealthways says that capital protection funds have lost sheen now as the markets have already moved up. “We recommended capital protection funds till September when the debt markets were doing well. Now the Sensex is close to 21000 levels. The kicker in returns from equity portion may not be achieved.”
