Investing in Capital Protection Oriented Schemes

Capital protection are two words that are music to the ears of investors. However, it is important to know that Capital Protection Oriented Schemes (CPOS) are oriented towards capital protection and do not offer guaranteed returns. The "orientation" towards capital protection happens from the way their portfolios are structured and not from any insurance cover or bank guarantee. Here's what you need to know when investing in capital protection oriented schemes of mutual funds.

Understanding Capital Protection Oriented Schemes

CPOS are essentially close-ended hybrid schemes. The majority of the corpus of such schemes (typically about 80%) is invested in debt and money market instruments while the remaining is invested in equity and equity related instruments. CPOS have tenures that range from 3-5 years.

As per the mandate of the capital market regulator, Securities and Exchange Board of India (SEBI), CPOS must ensure that the debt component of the fund grows to the initial amount invested during the tenure of the fund (thereby ensuring protection of capital). Besides, they must mandatorily be rated by a credit rating agency and must invest in instruments that have the highest rating.

How do CPOS' work?

In a CPOS, allocation of the corpus to debt is done in a manner such that at the time of maturity the debt investment in the fund grows to the original investment in the portfolio. The equity component adds to the returns of the CPOS.

Let us examine the following examples to understand how CPOS operate:

Three year CPOS Direct Equity strategy

Corpus (Rs)	100
Allocation towards debt instruments (Rs)	83
Value of debt at maturity (A)	100
Allocation towards direct equity	17
CAGR (%) on equity allocation	20
Value of equity at the time of the maturity of the scheme (Rs) (B)	22.63
Value of the CPOS upon maturity	122.63

 

Therefore, in direct equity investing we can see the value of debt grew from Rs 83 to Rs 100 and with a CAGR of 20% Rs 17 grew to Rs 22.63 over the tenure of the fund. Therefore the value of the fund on maturity was Rs 122.63.

Benefits of investing in CPOS

For those investors, who are spooked by the volatility of stock markets and yet do not want to lose out on the opportunity of making gains, investing in close-ended hybrid schemes such as CPOS can be beneficial. CPOS allow you to enjoy the benefits of investing in equities without risking your principal amount. It is the best of both worlds as 80% of the fund allocation is towards debt instruments that is highest rated paper and the remaining is put in equities which is the cherry on the icing. If the equity markets are on a rise in three to five years you could see your investments grow well. On the other hand if the markets tank and the equity performance is dismal, your capital is still protected.

When should you choose a CPOS?

You should choose a CPOS in any of the following scenarios:

• When markets are volatile and inflation level is medium to low.
• When your investment horizon matches the CPOS tenure.
• When you do not have the risk appetite for interest rate volatility risk.
• When you want to participate in equities but do not want the associated risks.
• When you seek tax efficient returns as compared to your fixed income deposits (Indexation benefits are available on CPOS over the long-term. You will be charged according to your income tax slab if you exit before maturity through stock market). Units of CPOS are listed for trading on the BSE and NSE, though the market may not be very liquid.

Conclusion

CPOS can be beneficial for people who have defined financial goals and want to lock a certain portion of their corpus for a period of three to five years to meet them. In the interim, if you do not want to lose out on the equity advantage, CPOS can prove to be the ideal vehicle for investment. However, one should not expect any guaranteed returns from CPOS at any given time.

 

 

The information contained in this document is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.