Volatile equities and the general uncertainty prevalent in the market have prompted some investors to look at capital-protection oriented funds, which invest in a manner such that the investor?s principal investment remains protected.
?The capital-oriented funds are seeing some traction of late. In this kind of volatile environment, investors are looking for safety of capital. They are willing to participate in equities, but only in products where the risk is managed,? said R Sivakumar, head, fixed income, Axis Mutual Fund. According to Dwijendra Srivastava, head, fixed income, Sundaram MF, this is a good time to get into capital-protection oriented funds as the three-year AAA-rated debt papers are now quoting at 9.8-10.2%, which is attractive.
According to industry observers, fund houses are pushing these funds to investors by paying high commission to distributors. Commissions for three-year products typically range from 4% to 4.5%, which is paid upfront to the distributor. The assets under management of these funds have risen to over R5,700 crore at the end of June 2013 compared with about R3,300 crore a year ago, according to data from Value Research, a mutual fund tracker.
Capital-protection oriented funds typically invest at least 80-85% of their corpus in debt and the rest in equity. The portfolio of these schemes are structured in a manner that the debt allocation of the portfolio leads to orientation towards protection of capital at the time of maturity and equity allocation of the portfolio provides upside over the face value. So, assuming an investor invests R100 in this scheme, say, R85 will be invested in debt and the rest in equity. The debt investment will grow to R100 at the end of the investment tenure, which means the investor will get back his principal even if his equity investment of R15 is wiped out.
Experts believe that these funds are safe as the investments are typically confined to AAA-rated papers, which have a low credit risk, and select large-cap stocks. The close-ended nature of these funds ensures that intermittinent volatility in yields, as seen in the past two months, does not impact the investment just like in the case of fixed maturity plans (FMPs). The typical lock-in is three years.
On the flip side, it is difficult for these funds to outperform diversified equity funds in good times. ?In case the equity market outperforms, these funds can lose out on the upside,? said Sivakumar. Capital-protection oriented funds have given average category returns of about 4.4% in the past year, Value Research data show. In comparison, equity diversified funds have given returns of about -3.8% during the period.