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Protection Paramount

Birla Sun Life MF is looking for investors who want their money safe

Birla Sun Life Mutual Fund is planning to launch yet another capital protection fund, having filed an offer document for the Birla Sun Life Capital Protection Oriented Fund Series 1 to Series 3 with the Securities and Exchange Board of India (SEBI).

Birla Sun Life MF already has two capital protection schemes, while the total in the industry is 12.

Like its existing schemes, the close-end scheme too will protect the capital, as is clear from its title, by investing predominantly in debt instruments, which are of the same tenure as that of this fund. Where it differs from the existing ones, which invest both in equity and equities derivatives, this fund will invest only in options.

In order to provide safety to the capital, the fund will invest a minimum of 65 per cent, and a maximum of 100 per cent, of its assets in debt securities.

Also, it will restrict the allocation to options premium to the expected interest income, less expenses, and will be subjected to a limit of 35 per cent of the assets of the fund under normal circumstances.

Therefore, in the worst-case scenario, that is if markets fall on the maturity of the fund, investors will not get any appreciation/gains, but their capital remains protected as the fund will not invest more than the expected interest income in the options premium.

Example:

If the fund is a 2-year plan, interest rate, post expenses, is 8.5 per cent per annum; option premium for a 2-year plan is 20 per cent; expense ratio is 1 per cent.

In order to offer downside protection at the end of the tenure, the fund will have to invest Rs 85 in debt securities. The remaining amount (Rs 15) is available for the fund to invest in options premium. Since the option premium is 20 per cent, at 15 per cent the fund will be able to offer only 75 per cent participation in the market.

Let’s look at potential investor returns in various market scenarios:

Possible Scenarios
Market goes up by 40% (absolute over 2 years) Market falls by 40% (absolute over 2 years) Market closes flat (after 2 years)
Debt investment (Rs.85) + interest income post-expenses (Rs.15) and gains on options (Rs 100 initial corpus * 75% participation * 40% market gain = Rs 30). Debt investment (Rs.85) + interest income post-expenses (Rs.15) and loss on options, which is equal to premium, no additional loss Debt investment (Rs.85) + interest income post-expenses (Rs.15) and gain/loss on options (premium value is lost, but there is no additional loss, as the fund will not exercise the option and let it expire).
Maturity value would be Rs.130. Maturity value would be Rs 100. Maturity value would be Rs 100.

The existing capital protection funds of Birla -- Birla Sun Life Capital Protection Oriented 3-year and Birla Sun Life Capital Protection Oriented 5-year – which were launched in July 2007 have delivered a return, since launch, of 4.76 per cent and 5.86 per cent respectively as on May 23, 2009. Their respective average assets under management (AAUM) are Rs 22.82 crore and Rs 12.29 crore as at end-May 2009.

So, if you are interested in a fund which gives the most importance to protecting the capital amount that you invested, rather than to capital appreciation, then this one is for you.