As the name implies, capital guaranteed (CG) schemes offer guarantee of the capital invested at the end of a pre-determined term.
Sameer Kamdar
As the name implies, capital guaranteed (CG) schemes offer guarantee of the capital invested at the end of a pre-determined term.
It means that irrespective of market conditions, the sponsor or the fund offering the product would guarantee the capital repayment of the investor’s money minus any front-end sales charge. The guarantee could be either complete or partial, depending upon the offer document.
Capital protection (CP) schemes, on the other hand, offers no guarantee of capital. The CG/CP schemes are widely popular abroad. For example, they form the largest category of unit trusts in the fund universe in Singapore, numbering almost 100 out of the 450-odd funds.
These funds are so popular that they form almost a majority of the offerings in the Middle East, Far East and the American markets. India is just about witnessing the launch of these schemes.
Risks
They are relatively low-risk instruments, since they are designed to protect capital in all market conditions through the use of quantitative techniques.
Since CG/CP schemes are for a fixed tenure, it is possible that they may underperform the broad market for some time.
To ensure capital protection, many funds may entirely invest in debt securities to greatly reduce potential gains in a rising market or greatly increase interest rate risks.
It may be noted that while your capital is guaranteed, your income is not. Also, the investors need to watch out for the higher expenses these funds may charge.
Rewards
One can usually expect to earn a certain rate higher than the risk-free benchmark like a fixed deposit (FD) rate or RBI relief bonds. Since these are not plain-vanilla funds, the rewards are usually much lower than regular funds, which can partake the full upside in market rallies.
The rewards are more in the form of peace of mind as these funds are designed to protect capital in all market conditions.
Things to look for
While considering CG/CP schemes, it is essential to vet the sponsors of the fund. Usually large mutual funds (MFs), banks and financial institutions are safer due to their vast experience, financial soundness and track record of dealing in these products.
Premature redemptions from these funds may considerably reduce the returns to investors while also eliminating the capital guarantee or protection. However, while your capital is guaranteed, your income is not. Also, the investors need to watch out for the higher expenses these funds may charge.
Recent performance
The performance of CG/CP funds globally has been quite disappointing in 2005 as they delivered poorly while equity and commodity markets and funds notched up huge gains.
Even this has not reduced the appetite for such funds. And as more uncertainties like higher interest rates and spiralling oil prices loom large, a lot of risk-averse investors are taking shelter under the CG/CP umbrella.
The imminent introduction of CG/CP schemes in India augurs well for all concerned.
While the AMCs or fund sponsors would find a large market for these schemes among both institutional and retail investors, particularly, retail investors would benefit the most since the risk-wary ones would be able to invest with no worries of losses or capital erosion.
Since a majority of Indians still invest a large part of their savings in safe schemes like FDs or small savings, they would find an attractive alternate avenue in CG/CP funds to get better returns on their hard-earned savings, ensuing them a good night’s sleep.
While CG/CP funds are favoured by corporates and institutional investors world-wide, it remains to be seen how they are rolled out to retail customers in India.
(The author is the national head of mutual funds at Mata Securities)
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