Over a year ago, with much hype and hoopla, mutual funds in India added another product to their bouquet — capital protection funds.
Franklin Templeton Mutual Fund and UTI Mutual Fund launched the first such schemes in October and December 2006, respectively, and a few other fund houses followed them. After the initial euphoria, now it looks like the plot has got lost somewhere.
It has been a while since the industry last witnessed the launch of a new capital-protection oriented scheme.
What are theyM
Capital protection-oriented funds’ structure ‘protects’ capital invested when the scheme matures. While the schemes’ assets are invested in rated debt securities, investors could also get a portion of their investment returns linked to the equity market for capital appreciation.
These schemes are generally three- or five-year close-ended schemes and work best for risk averse investors.
For investors, it is enticing indeed. This meant that of the Rs 100 invested, the principal amount would be ‘protected’. Higher returns, if any, are always welcome.
What needs to be reminded is that the protection is not guaranteed but tried for.
At present, Franklin Templeton Mutual Fund, UTI Mutual Fund, Deutsche Mutual Fund, Birla Sun Life Mutual Fund, Sundaram BNP Paribas Mutual Fund, and SBI Mutual Fund offer these schemes.
Kotak Mahindra Mutual Fund filed offer documents for a three-year capital protection oriented debt scheme in October 2007.
What went wrong?
Some say the guidelines are stringent, while some swear by how investors should be better educated about such structured products.
“The guidelines are still tight. You can’t ‘guarantee’ returns in spite of capital protection. Pure capital protection is not attractive enough,” said Sandesh Kirkire, chief executive officer, Kotak Mahindra Mutual Fund.
Gidelines of Sebi do not allow fund houses to ‘guarantee’ returns.
“These (capital protection oriented) products are doing better through portfolio management services and other platforms,” Kirkire said.
Interestingly, UTI Mutual Fund President Amandeep Chopra says, “These schemes are not part of an investor’s core holdings. Most investors still prefer pure equity or debt products.”
SBI Mutual Fund’s SBI Capital Protection Oriented Fund - Series I, a five-year close-ended fund, was the last one to be launched — in October 2007. The investor response to these schemes has not been phenomenal either.
Barring the first such scheme—Franklin Templeton Capital Safety Fund that collected Rs 500 crore in its new fund offer and the ones launched by SBI Mutual Fund and UTI Mutual Fund that raised Rs 300 crore and Rs 250 crore, respectively, none of the others registered significant mop-ups when launched.
Returns
Returns from the existing funds have been volatile. While they have not been exceptionally bad, very high returns have not been registered either.
| CAUTION & ATTENTION Returns since launch and for the month, quarter and year ended Sept 1 (%) | ||||
| Scheme |
Since launch | |||
1-mth
3-mth
1-yr
Oriented Fund (5-Year)
Protection Oriented Fund (5-Year)
Capital Protection Oriented Fund 1 (5-Year)
--
Oriented Fund Series I
--
“These are long-term funds. Short-term performance does not give a true picture. (Long-term) yields have been locked in and all the volatility is in between,” said Agrawal of SBI Mutual Fund.
While Chopra is of the view that there shall “always be a market for risk averse investors”, Agrawal thinks now is the good time for new capital protection funds and lock in assets at high yields.
