Recently, a new category named capital protection oriented schemes made its debut in the mutual fund industry. As the name suggests, the mainstay of such schemes is to provide capital protection.
Structurally they are similar to another existing mutual fund category called fixed maturity plans, which has been around for a while. For investors, the presence of these categories which are structurally similar, yet distinct in terms of positioning can be confusing. We decided to face-off the two categories and find out how similar or dissimilar they are.
To start with, let us first look at the two categories independently and understand what they offer to investors.
FMPs are close-ended debt funds (investments can be made only during the new fund offer period) with a fixed maturity horizon. They can also invest a smaller portion of their corpus in equities. FMPs target a given yield (return), lock-in the same at the time of investment and stay invested till maturity.
In turn, investors who stay invested in the fund till its maturity are virtually assured of clocking the designated returns. It should be understood, that being a market-linked investment avenue, the returns aren't assured or fixed. Hence, deviations in the designated returns on account of market fluctuations cannot be ruled out.
Conversely, CPOSs are close-ended debt funds, oriented towards the protection of capital invested. Again, the capital protection is not guaranteed. The portfolio is constructed in a manner to provide the investor with at least the amount invested on maturity.
As mentioned earlier, both FMPs as well as CPOSs are structurally similar to each other. Both the schemes attempt to combine the stability of debt along with the power of equities. Normally, these funds invest a majority of the corpus (say at least 80 per cent) in debt instruments and the balance (around 20 per cent) in equities.
The portfolio is so designed, that the amount of money invested in the debt component is equivalent to the initial investment on maturity. For example, out of Rs 100 invested, the fund invests Rs 80 in debt instruments, which will amount to Rs 100 on maturity. Thus, the debt portfolio attempts to preserve the initial investments made by investors, while the equity portfolio (Rs 20 in this case) is utilised to generate capital appreciation.
FMPs and CPOSs have certain dissimilarities as well:
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CPOSs are oriented towards capital protection, hence the defining feature of schemes from the segment is providing safety of capital. Generating capital appreciation is relegated to second position.
Conversely, FMPs are return-oriented investment avenues and not inclined towards protection of invested amount. The primary aim of such funds is to generate returns.
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As per SEBI (Securities and Exchange Board of India) guidelines, it is mandatory for all the AMCs (Asset Management Companies) to get the proposed portfolios of their CPOSs rated by a SEBI registered credit rating agency. Also, the rating has to be reviewed on a quarterly basis and AMCs must ensure that the debt component of the portfolio has the highest investment grade rating (AAA or P1+).
FMPs tend to primarily invest in debt instruments with a high credit rating as well, but they have a free hand in terms of the instruments they can invest in. Similarly, it is not mandatory to get the portfolio rated by any credit rating agency.
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CPOSs are close-ended in nature and don't offer any option to investors for premature withdrawals. Hence investors are advised to park only that portion of their investible surplus, which can be put aside for a longer time frame.
Investors in FMPs have the option of prematurely exiting their investments; however, the same would attract an exit load as specified by the fund house
Investors would do well to understand that both CPOSs and FMPs cater to the needs of different types of investors. For an investor, who accords greater importance to capital preservation over capital appreciation, CPOSs is the place to be.
On the other hand, investors who are looking at clocking a 'somewhat' assured income, FMPs should be the chosen investment avenue. It is essential for investors to be aware of the nuances of both the categories, so that they can make more informed investment decisions.
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