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Not the Ideal Protection

Returns just don't justify the lock-in period of Capital Protection Oriented funds...

The pendulum-like fortunes of the equity markets over the last few years have taken a toll on the returns posted by Capital Protection Oriented funds. While they have surely been successful in protecting the capital, they don't have much to show-off in terms of returns.

Currently, there are 69 capital protection oriented funds with an asset base of Rs 6,246 crore. Till date, 14 funds have matured and the returns from these have ranged between 3.99 per cent and 8.90 per cent (both 3-year and 5-year tenures). The fact that they compromise on liquidity, being close-ended funds, the returns don't look appealing. While the debt portion ensures capital protection, the higher returns can come only through the equity part; which will only happen if markets perform.

The first capital protection oriented fund, Franklin Templeton Capital safety (3-year and 5-year), was launched in November 2006. Soon after this, UTI came out with its capital protection funds. However, these funds never caught investors' fancy due to the market rally that time. Hence in 2007, eight funds collected a sum of just Rs 355 crore. Given the measly response, no fund was launched in 2008 and 2009 though they made a comeback in 2010 with seven launches. In year 2011 and 2012, 30 and 23 funds were launched which collected Rs 1,738 crore and 927 crore, respectively.

Also, in all such funds, 'capital protection' is a goal and not an obligation. By law, funds are not allowed to offer guarantees and that is why such funds are termed as 'Capital Protection Oriented' funds.

But, one way by which these type of funds score over bank fixed deposits is in terms of taxation. If redeemed after one year they are taxed at the rate of 20 per cent with indexation and 10 per cent without indexation while in case of bank fixed deposits TDS (tax deducted at source) is deducted at 30 per cent for a person falling in the highest tax bracket.