Capital protection funds not to have exit option

The Securities and Exchange Board of India (Sebi) has opened the doors for the mutual fund industry to launch "Capital Protection Schemes," which protect investors against erosion of capital invested in mutual fund units.

Guidelines for such schemes, notified by the capital market watchdog on Thursday, stipulate that they will be close-ended.

Unlike existing schemes, asset management companies will not repurchase units of these schemes before the end of the maturity period. Existing close-ended schemes allow investors to surrender units with exit-load, or penalties.

A rating by credit rating agencies is mandatory for Capital Protection Schemes. According to the Sebi notification, the units of the scheme should be rated by a registered credit rating agency "from the viewpoint of the ability of its portfolio structure to attain protection of the capital invested."

A popular class of schemes worldwide, capital-assured funds typically invest in safe fixed-income products like highly rated corporate and government bonds, to ensure protection against erosion in the value of the initial investment at the time of maturity, typically more than three years.

After the debacle of the "assured-returns schemes" of public sector funds, including the US-64 Scheme of the Unit Trust of India, Sebi had banned all assured return schemes. However, the Association of Mutual Funds of India had been lobbying with Sebi for allowing fund houses to launch "Capital Protection Schemes."

"As far as sophistication of investment is concerned, this is not really a big step forward; but, from a marketing point of view, there will definitely be takers as the attraction of not losing your investment will be a draw," said Dhirendra Kumar, chief executive of ValueResearch India, an organisation that tracks the mutual fund industry.

"Particularly in a country with a long history of government-guaranteed investment schemes such as post-office savings, such options are likely to appeal to investors looking at safe but not very high returns," he added.