Investors over fifty are certainly not young but still have a medium tenure of 10-15 years for an investment outlook. They thus have different investment profile theyâ€™re not chasing high risk, but prefer safe investments with moderate returns.
Investors are often bombarded with expert opinions on how wealth can be created in the long term by investing systematically from a young age. The ideal investment for such investors so far has been fixed deposits (FDs) or Post Office small savings schemes (SSSs), where the capital is safe and returns low. A unique and relatively new theme in mutual funds to a better alternative to such investment is capital protection-oriented funds (CPFs). The mainstay of CPFs is to protect against erosion of capital invested in mutual funds units during the investment, while also trying to give better returns than FDs or SSS.
In CPFs, a large portion of the investment is put in debt securities, while a tiny portion goes into equities to enhance returns. These funds are ideal for conservative investors, for whom safety is paramount. CPFs are close ended variants of monthly income plans (MIPs). Around 70% to 100% of the portfolio of CPFs consists of high quality debt and fixed income securities. The former typically include government securities and corporate bonds with a AAA or equivalent rating. Equity exposure is generally limited to the 30% of the portfolio.
CPFs are typically closed-ended with tenure of three to five years. The average equity exposure of funds with 3 year tenure is around 20%, and around 30% in case of 5-year tenure. To give an idea, the 80% invested in a 3 year CPF fund become 100% due to interest accrual over three years, thus making the portfolio safe. The fund manager is then free to invest the remaining 20% in equities to generate a higher return. Likewise the 70% invested in debt in a 5 year fund become 100% thus leaving the fund manager to generate excess returns on the balance 30% through equities. This equity component boots returns potential. Further, since CPFs are close-ended they donâ€™t face redemption pressures, enabling them to better manage the pre-defined maturity portfolio. Although CPFs try to protect investorsâ€™ capital, neither the Asset Management Company nor the sponsor actually backs such a promise. The market regulator requires that capital protection should arise purely from the way the portfolio is constructed. The AMC or sponsor is not bound to make up for the difference in the rare case of capital erosion.
To protect investorsâ€™ interests, Sebi requires CPFs to have a credit rating. The rating is based on the fundâ€™s ability to protect investorsâ€™ preliminary investment. Ratings are reviewed quarterly. This enhances investorsâ€™ safety.
As for tax, these funds are treated like debt funds, and are taxed likewise. Investors pay long term capital gains tax at the rate of 22.66% with indexation benefit or 11.33% without indexation benefits at redemption. However, tax is higher on products like FDs. So CPFs are more tax efficient than FDs especially if the investor falls in the high income bracket.
The first CPF, launched by Franklin Templeton in November 2006, was the Franklin Templeton Capital safety Fund. Franklin Templeton Capital Safety Fund is the largest CPF with a corpus of around Rs 300 crore as of November 2007.
As most CPFs were launched in 2007, it is difficult to judge their performance. Still, Franklin Templeton Capital Protection Fund & UTI Capital Protection Oriented Scheme have been consistent performers, beating their benchmark Crisil MIP Blended Index over 2 to 6 month time frames. Overall CPFs have delivered 6-month annualized returns of over 19% is significantly higher than FDs of SSSs , whose inflation adjusted returns offer little solace to investors. Investors should break out of traditional avenues of investing and should consider CPFs as a much better alternative. Capital Protection Funds with low risk, relatively high returns and better taxation make for a lucrative investment option for investors.