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Capital Protection Funds

Summary:

  • Capital Protection Funds represent that they preserve capital by taking lower risks. However, recent performance has shown that this is not the case.
  • Capital Protection Funds aim at preserving the capital invested in such funds, especially at times of market volatility
  • These are 3-5 years closed ended funds. Therefore, the investor needs extra space to have a long term, as there can be no liquidity in the interim.

Who can invest in Capital Protection Funds:

  • An investor looking at capital preservation as an investment objective
  • An investor looking at investing for at least 3 years
  • An investor looking at tax efficient returns (substitute for PPF or FDs)

Limitations of Capital Protection Funds:

S.No.

Limitation

Description

1.

No Guarantee

 

  • SEBI does not permit funds to provide any guarantee for capital protection
  • The asset management company is not liable to pay back in case of capital erosion.

 

2.

Low Liquidity

 

  • Being closed ended in nature, the investment is not liquid
  • The amount can be redeemed only at the end of the tenure of the fund

 

3.

Returns

 

  • The returns of capital protection funds are not in line with the returns of equity funds, but rather more in line with the debt funds due to the higher debt allocation

    •  

4.

Taxation

  • The taxation of capital protection funds is same as that of debt funds

Taxation

Individuals

Corporates

Short Term Capital Gain Tax

As per income tax slabs

As per income tax slabs

Long Term Capital Gain Tax

11.33% without indexation or 22.66% with indexation whichever is lesser

11.33% without indexation or 22.66% with indexation whichever is lesser

Dividend Distribution Tax

14.16%

22.66%
* The rates indicated above are inclusive of surcharge and cess applicable

5.

Entry Load

 

  • There is no entry load in capital protection oriented fund

 

Returns Comparison:

Rs 10,000 were invested on 1st July 2008:

(Value as on 20th January 2009)

FUND NAME

Market Value (Rs)

Absolute profit/loss (Rs)

% Absolute Gain/Loss

Birla Sun Life CPO* Fund

10,200

200

2.0%

Franklin Templeton CPO Fund

10,236

236

2.4%

Franklin Templeton Capital Safety Fund

10,209

209

2.1%

Sundaram BNP Paribas CPO Fund

9,905

-95

-0.9%

Birla Income Plus

11,826

1,826

18.3%

Birla Sun Life Income Fund

11,614

1,614

16.1%

BSE Sensex

7,198

2,802

NA
* CPO = Capital Protection Oriented
  • Almost all the CPO Funds have underperformed their benchmark i.e. CRISIL MIP Blended Index.
  • Though CPO funds have fallen less compared to BSE Sensex but have under performed when compared to debt funds (Birla Income Plus etc.)

When Compared with other fund types

  • Monthly income plans and income funds have over performed capital protection funds throughout in last 6 months
  • Since capital protection funds does not guarantee capital protection, pure debt funds or monthly income plans act as a better option.

iTrust Observations:

  • While capital protection funds represent themselves to be safe and secure with lower risk of capital loss, their market performance during this volatile period has shown themselves to be quite risky.
  • Recent performance suggests that debt funds are more stable compared to capital protection funds. In addition, offer more liquidity and flexibility to investors, compared to a 3-5 year lock up in capital protection funds
  • Investors shouldn't rush into capital protection funds because so far their performance has not turned out to be as represented. (Since CPO Funds are recently launched, the performance of these funds at the time of redemption will be a better indicator of the returns delivered).

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