CPFs may lock-in money in an illiquid product but are a safe bet.
Capital protection-oriented funds (CPFs) are under the spotlight. While the Securities and Exchange Board of India (Sebi) raised doubts over the quality of investments that CPFs make, two new fund offerings were launched — the JPMorgan India Capital Protection Oriented Fund, which is a 39-month closed-end income scheme, and the Sundaram Capital Protection Oriented Fund Series-2, a three-year closed-end fund.
Yet, for investors such as Anita Puri, CPF is not an easy decision. Her financial advisor has asked her to look at other options in the debt segment. “My advisor pointed out that investing in CPF would mean locking-in money in an illiquid product for three years,” she says.
CPFs invest a large portion — 70-80 per cent — in fixed income securities, which mature on or before the scheme’s tenure to preserve the investor’s capital. The remaining funds are invested in actively managed equity portfolios for additional returns in a bullish market and downside protection in a bearish market. It works best for conservative investors, who are not likely to dip into their investments for the entire fund tenure.
A tilt towards debt makes CPFs comparable to monthly income plans (MIPs) and fixed maturity plans (FMPs). MIPs that pay investors dividends are open-ended hybrid funds, investing in both equity and debt. According to Sunil Subramaniam, director-sales and marketing, Sundaram Mutual, “Those who opt for MIPs need to actively manage their debt investments, which can lead to an interest rate risk.”
| AVERAGE SCHEME PERFORMANCE | |||
|
Scheme
| Average returns | ||
| 1st year | 2nd year | 3rd year | |
| *CPF | 5.76 | 14.51 | 5.08 |
| MIP | 6.84 | 13.57 | 6.85 |
| FMP | 5.33 | 6.17 | 7.26 |
| * Returns based on performance of six schemes Source: MFI, fundsupermart.com compilations | |||
FMPs may not be suitable for investors with a specific three-year time horizon. These schemes are limited to shorter tenures of one-two years. Such investors may not have many options other than a CPF. “FMPs, which are pure debt, closed-end products miss out on the capital appreciation a CPF gets, due to its equity investments,” says Rajesh Krishnamoorthy, managing director of mutual fund portal fundsupermart.com.
More From This Section
A CPF with its hybrid mandate provides an equity- and debt-portfolio package, without the inherent volatility of MIPS.
Return on investment
At present, the yield for triple A (AAA paper) three-year corporate bond paper is 8.5 per cent. So, returns from a CPF should be higher after additional gains generated by a fund’s equity investments.
According to Hemant Rustagi, CEO, Wiseinvest Advisors, “It is ideal for people who can’t decide on their asset allocation and do not manage their portfolios actively.”
Rustagi says, “The debt portion of a CPF works like an FMP. Investors can lock-in money at higher yields. However, the returns on CPFs are compromised, as the debt portion is not actively managed. Returns are also lower than those for MIPs or FMPs.”
Figures from fundsupermart.com show while MIPs and FMPs, as categories, gave an average of 6.85 per cent and 7.26 per cent return, respectively, the average third-year return from five CPF schemes was 5.08 per cent.
Mid-term exits
Although CPFs are listed on stock exchanges, exiting before the maturity period is not easy. In the absence of a secondary market, investors need to sell it at a discount. An MIP, on the other hand, is flexible.
Tax benefit
High net-worth individuals in the highest income bracket (30 per cent) can benefit from the tax rebates that all the three categories offer. Investors can get inflation indexation benefits, and they are taxed at the rate of either 10 per cent without indexation, or 20 per cent with indexation. In addition, dividends accrued from an MIP are tax free in the hands of investors.
