In the last few months HDFC Mf has launched series of Capital protection oriented How to Invest in Mutual Funds for the investors who are not comfortable with taking risk in equity market. When anybody hears capital protection, it looks lucrative on one hand; however when you go deep into the product information the reality comes out. This category of funds are not popular in the market, reason being the performance of this category is highly disappointing.
About HDFC Capital Protection Oriented fund
It is a close-ended capital protection oriented income scheme with tenure of 36 months. The scheme will have a portfolio mix of highest rated debt and money market instruments along with the exposure to equity. On one hand these kinds of funds are ideal for capital protection during a downturn; on the other hand, it does not help much in creating wealth for investors. One of the best features of capital-protection-oriented MFs is that it enables risk-averse investors to gain exposure to equities.
Investment objective / Strategy
The scheme is made to generate returns by investing in a portfolio of debt and money market instruments which mature on or before the date of maturity of the scheme. The scheme also seeks to invest a portion of the portfolio in equity and related instruments to achieve capital appreciation. By having a portion of equity in the portfolio, the fund will also generate returns in good times.
Debt portion – 83% – 88%
Equity portion – 12% -17%
The debt portion of 83% of the invested capital will grow over the tenure of the scheme to 100% thereby protecting your capital. Rest 17% will be invested in equities which will provide upside in the portfolio.
Assumed Situation over 3 years….
|Scenario 1||Scenario 2||Scenario 3||Scenario 4||Scenario 5|
|CAGR on Equity||20%||10%||0||-10%||-20%|
|Equity value on maturity (A)||29.38||22.63||17||12.39||8.70|
|Debt value on maturity (B)||100||100||100||100||100|
|Scheme value at maturity (A+B)||129.38||122.63||117||112.39||108.70|
Source: SID of The above scheme.
The above illustration clearly explains that what returns a portfolio can generate in any of the above 5 scenarios. The debt portion is clearly invested for capital protection and the equity returns generated by the scheme would depend on the portion of asset allocation of equity. The above allocation is just an example to show how this fund will work and actual allocation may be different.
Should anyone invest in this scheme?
As per the illustration, in case people invest in this scheme and get 0% returns on equity then the value of Rs.100 invested at the end of 3 years would be Rs.117/- Thus generating a CAGR of 5.37% only.
Now if you go by the name “Capital Protection”, the scheme must generate returns equal to the inflation rate prevailing in the economy. If in a scheme if you get back less than what inflation is then you have actually lost the value of your capital. Even if you keep Rs.100 in a bank FD for 3 years at prevailing risk free interest rate of 8.5% than also you will get back Rs.127. Today minimum expectation of an investor is to get bank fd interest rate and not less than that. So its better to form your own strategy and protect your capital rather than paying high management cost to MF company and getting back minimum out of that.
So to conclude, it’s better to avoid Capital Protection Funds as the features of the scheme are not very attractive and the same can be done with the help of your Investment Planning advisor or Financial Planner.