Summary:
- Capital Protection Funds represent that they preserve capital by taking lower risks. However, recent performance has shown that this is not the case.
- Capital Protection Funds aim at preserving the capital invested in such funds, especially at times of market volatility
- These are 3-5 years closed ended funds. Therefore, the investor needs extra space to have a long term, as there can be no liquidity in the interim.
Who can invest in Capital Protection Funds:
- An investor looking at capital preservation as an investment objective
- An investor looking at investing for at least 3 years
- An investor looking at tax efficient returns (substitute for PPF or FDs)
Limitations of Capital Protection Funds:
S.No. | Limitation | Description |
1. | No Guarantee | - SEBI does not permit funds to provide any guarantee for capital protection
- The asset management company is not liable to pay back in case of capital erosion.
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2. | Low Liquidity | - Being closed ended in nature, the investment is not liquid
- The amount can be redeemed only at the end of the tenure of the fund
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3. | Returns | - The returns of capital protection funds are not in line with the returns of equity funds, but rather more in line with the debt funds due to the higher debt allocation
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4. | Taxation | - The taxation of capital protection funds is same as that of debt funds
| Taxation | Individuals | Corporates | Short Term Capital Gain Tax | As per income tax slabs | As per income tax slabs | Long Term Capital Gain Tax | 11.33% without indexation or 22.66% with indexation whichever is lesser | 11.33% without indexation or 22.66% with indexation whichever is lesser | Dividend Distribution Tax | 14.16% | 22.66% | | * The rates indicated above are inclusive of surcharge and cess applicable |
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5. | Entry Load | - There is no entry load in capital protection oriented fund
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Rs 10,000 were invested on 1st July 2008:
(Value as on 20th January 2009)
FUND NAME | Market Value (Rs) | Absolute profit/loss (Rs) | % Absolute Gain/Loss |
Birla Sun Life CPO* Fund | 10,200 | 200 | 2.0% |
Franklin Templeton CPO Fund | 10,236 | 236 | 2.4% |
Franklin Templeton Capital Safety Fund | 10,209 | 209 | 2.1% |
Sundaram BNP Paribas CPO Fund | 9,905 | -95 | -0.9% |
Birla Income Plus | 11,826 | 1,826 | 18.3% |
Birla Sun Life Income Fund | 11,614 | 1,614 | 16.1% |
BSE Sensex | 7,198 | 2,802 | NA |
* CPO = Capital Protection Oriented
- Almost all the CPO Funds have underperformed their benchmark i.e. CRISIL MIP Blended Index.
- Though CPO funds have fallen less compared to BSE Sensex but have under performed when compared to debt funds (Birla Income Plus etc.)
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