Over the last few months, several fund houses have launched Capital Protection Oriented Fund. This type fund protect your capital, means your investment is safe. If you invest Rs.100 then you get back Rs.100 guarantee, but what about returns.

 

Capital Protection Fund (CPF) and Capital Protection Oriented Fund (CPOF) is same.

Point Cover 

  1. What is CPF?
  2. How rating work for these fund?
  3. Investment Strategy
  4. Taxation
  5. Limitation of CPFs

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What is CPF?

Capital Protection oriented Fund is structural investment product that allow you to enjoy the benefit of investing in stocks without putting your principal at risk.
Capital Protection oriented fund invest big amount (70% to 80%) invest in fixed income instrument and the balance in equities.
Suppose 80% of the corpus in put AAA rated bonds offering an interest rate 8.50%. By the end of term, this debt portion would grow to the principle amount, thus insuring that the capital is protected. The remaining 20% to 30% of the money invested in equities to earn extra income.

How Rating work for these CPFs ?

 The ratings on CPFs indicate the degree of certainty regarding timely payment of the face value of the units to unit holders on maturity of the scheme. The rating on CPFs  is on the structured obligation (so) scale.
The is not comment on the scheme’s NAV in relation to the face value of the scheme’s unit at any time before their redemption.

Rating Benefits:

  • Provides investors with an independent opinion on the likelihood of timely repayment of the initial investment in the rated instrument on maturity
  • Allow investor to participate in upturns in the equity market without suffering erosion in value of the investment in case of a downturn.

Investment Strategy

 Type 1 :  Option base

Debt Portfolio strategy :The scheme would invest a % of the amount in highest rated debt & money market instrument maturing on or before the maturity of scheme.

Strategy for Option Premium Investment : The balance amount after investing in debt & money market instruments is intended to be invested in equity market through derivatives like Index Call options which could provide market linked returns.

  • If market goes up, buyer has a right buy the index at a lower level & sell at the prevailing rate, thereby realizing profit
  • If market goes down, the buyer loss premium paid. But maximum loss for a buyer is premium paid

 

Taxation

CPFs are taxed like as debt funds, Long term Capital Gains are taxed  @ 10.3% without indexation or 20.6% with indexation

Limitation of CPFs

Low Liquidity 

  • Being close ended in nature, the investment is no liquid
  • The amount can be redeemed only at the end of tenure

No Guarantee for your Capital & Returns

  • SEBI does not permit fund to provide any guarantee for capital protection.
  • The Mutual Fund house is not liable to pay back in case of capital erosion.

If the issuers of the high quality fixed income instrument default, a scheme may show capital loss.

 

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