India is in the middle of a boom and, on the basis of strong second-quarter results, the momentum is accelerating. But the strength of the bull run leaves investors on the horns of a dilemma. You invest, the market drops and you lose capital. You don’t invest, the market rises and you lose the opportunity. The answer may be a capital protection oriented fund (CPF). In a CPF, the portfolio is constructed so as to ensure that the principal is guaranteed on maturity. This is done through a judicious mixture of debt and equity (or even more risky, high-return instruments, such as derivatives).
For example, out of Rs 100, the fund may invest Rs 70 in debt instruments with a term of five years and a rate of 8%. This guarantees a return of Rs 102.85 on maturity and ensures “capital protection”. The rest is invested in equities. This offers a chance to participate in a rising equity market without risking the loss of principal. After Sebi released its CPF guidelines in August, Franklin Templeton was the first off the block with its FT Capital Safety Fund (FTCSF).
This is the first branded CPF (see NFO Snapshot). The FTCSF offers two plans with three-year and five-year horizons. The threeyear plan will allocate up to 20% of the corpus to equities, while the balance will be held in term debt and money market instruments. The five-year plan will invest a higher portion (up to 30%) in equities. Franklin’s Fixed Tenure Series fund and Kotak Mutual Fund’s Kotak Twin Advantage Series also work on similar lines. But these schemes can not be called CPFs since they were launched before Sebi permitted the use of the phrase “capital protection”.
The structure of a CPF can be replicated by customised investments in debt funds and equity funds. Say, if you invest 70% in a debt fund and 30% in an equity fund, you would achieve the same kind of pay-offs. You could also harness small savings: Invest a sum in a post office monthly income plan for six years and invest the monthly payout into an equity fund through a systematic investment plan (SIP).
An interesting variation is the Principal Protected Portfolio scheme from Prudential ICICI for high net worth individuals. This has Constant Protected Portfolio Insurance (CPPI) —any shortfall in principal is made up by the insurer, DeutscheBank London.
If you don’t have the time or inclination to do it yourself, you can go in for a CPF. These are good investments for conservative or first time investors seeking equity exposure. The flip side is, you can forget about the money for the entire lock-in period. If you have to withdraw before maturity you may not get the entire capital back.