AMCs rush to launch capital protection funds to woo risk averse investors

Fund houses are launching capital protection funds to woo risk averse investors. AMCs have launched eight capital protection funds in the past three months. HDFC, LIC Nomura, ICICI Prudential, Union KBC which recently launched their capital protection funds have filed offer documents with SEBI to launch the next series of such funds.

While HDFC has collected a decent corpus from its recent capital protection NFO, other players have collected in the range of Rs. 45 to Rs. 100 crore.

HDFC Mutual Fund’s capital protection fund is said to have collected over Rs. 900 crore. ICICI Prudential Capital Protection Oriented Fund IV - PLAN E - 36 Months collected Rs. 113 crore. LIC Nomura’s Series 1 capital protection fund collected Rs. 50 crore.  Union KBC Capital Protection Oriented Fund - Series 3 collected Rs. 45 crore.

“Investors have not seen good returns in equity funds over the last five years. The environment is uncertain. Investors are preferring to protect their capital. The returns from capital protection funds should be decent due to the attractive market valuations,” said the product head of a large fund house.

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 a year. The returns from capital protection funds could be hard to predict as the capital appreciation is completely dependent on equity markets performance.

“Some investors don’t want to take direct exposure to equity which is why AMCs are offering capital protection funds. Capital protection funds which got matured recently have delivered from 4% to 12% CAGR. The performance of these funds depends on the timing of the launch,” said Vinod Jain of Jain Investment.

Not many are convinced about the concept of capital protection funds. “Capital protection funds are ULIPs of MF industry. AMCs pay up to 3% commission and there’s hardly any money to be made for small AMCs,” said the sales head of a foreign fund house.