Investment schemes

Mutual funds are becoming masters at attractively packaging and marketing new mutual fund schemes. A new scheme type in the news is Capital Protection Schemes (CPS). Here are insights about this scheme type and its similarity to Fixed Maturity Plans (FMP) and Monthly Income Plans (MIP).

Debt investing involves a large number of choices, especially if one takes the mutual fund route. Investing in debt through mutual funds involves choosing from among a number of scheme types – long-to-medium term debt funds, liquid funds, floating rate funds, etc. A recent addition to these choices is Capital Protection Schemes (CPS). However, a closer look at this product shows that it offers largely the same features as Fixed Maturity Plans (FMP) and Monthly Income Plans (MIP).

Both FMP and CPS are close-ended funds while MIP are usually open-ended.

FMP invest in debt securities with a similar tenure as that of the scheme. They stay invested in these debt securities, which results in the FMP investor knowing what his expected return on the FMP will be. FMP seek to offer the investor optimum income from debt investments for a particular tenure.

CPS seeks to protect their investors’ investment amounts, i.e., the capital invested, by CPS investors. In other words, the investor in a CPS will get back at least his capital invested, when the scheme matures.

MIP seeks to offer the investor returns that are marginally higher than debt investment returns by investing a portion of the corpus in equity.

CPS seeks to protect the investor’s capital by investing in the safest debt securities. CPS has to compulsorily get their debt investments rated. They are permitted to invest in only those debt securities which have the highest rating. However, the scheme cannot guarantee capital protection. In addition, a marginal portion is invested in equity for a possibility of marginally higher returns.
While CPS and MIP invest 15 to 30 per cent in equity, FMP invests only a marginal amount (0.5 to 1 per cent) in equity.

Investment returns:

CPS is a new concept in the market. Presently, there are only four such schemes, which have been recently launched – the Franklin Templeton Capital Safety Fund – 3 years and 5 years and UTI Capital Protection Oriented Scheme — 1–3 years and 5 years.
Where FMP and MIP are concerned, the latter has offered better returns across all time periods. This is because MIP have a higher component of equity investments (the equity markets are at a high presently), which has offered significant capital appreciation for MIP.

MIP offers continuous repurchase, since they are open ended schemes.
FMP offers repurchase facilities periodically. However, this facility is offered at very high exit loads (2-3 per cent).
CPS neither offer any repurchase facilities nor are they listed on the stock exchange. In other words, they are completely illiquid.

Tax on investing in MIP, FMP and CPS:

All the three scheme types are debt schemes where dividend is tax-free in the hands of the investor. Where capital gains are concerned, the tax rate on short-term capital gains (i.e. profits on sale of units held for less than one year) is the same as your personal income tax rate. In case of long-term capital gains, capital gains tax is computed in two ways – (1) at 10 per cent (+ 10 per cent surcharge, if applicable + 2 per cent education cess) on the gain without considering indexation and (2) 20 per cent with indexation (+ 10 per cent surcharge, if applicable + 2 per cent education cess). The lower amount of these two options is the tax payable on long-term capital gains.

Debt schemes are largely created to service various investor needs. Consider your needs and assess which scheme types can best fulfill them before making your investment.