What is Capital Protection Oriented Funds (CPOF)?

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Lorin Underwood
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2 What is Capital Protection Oriented Funds (CPOF)? CPOF is a close ended hybrid fund, which primarily endeavours to protect capital with a secondary objective of providing growth opportunities, over the long term Generally CPOF invests predominantly into debt and a small portion of portfolio in equities Debt : investment in debt asset class is done with a view that the invested portion grows to atleast 100% of the portfolio value over the tenure of the scheme. Equity : A small portion of the portfolio is invested into equities, with a view to provide capital appreciation over the long term Suitable for conservative investors who are not comfortable with interest rate risk and high equity market volatility Portfolio structuring endeavors to provide capital protection as well as growth opportunities, without undertaking any significant risk 2

3 Solution for Conservative Investors Expected Returns Capital Protection Oriented Fund is suitable for conservative investor with a potential for growth over the long term Equity Fund Equity Hybrid Fund Asset Allocation Fund Equity Savings Fund Debt Hybrid Fund Capital Protection Fund Arbitrage Fund Liquid Fund Expected Volatility The above illustration is for indicative purpose only. The above chart is not drawn according to scale and is not based on any historical data. Taxes, expenses and any other associated costs have not been taken into consideration Past performance is not indicative of future returns. 3

4 The need for conservative investor to add equities in the portfolio % 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% Trend in Interest Rates(%) ( ) Scenarios for Rs 1 lakh invested every year for 30 years, at varying rate of interest Rate of Return (%) Final Corpus ( Rs Crores) 12% % % % % % 1.01 PPF SBI 3 years Term Deposit Traditional savings instruments in India has seen a declining interest rate scenario in the past 2 decades Our previous generation had the choice of investing in high yielding instruments However, with interest rate now in the range of 6.5%-8% there is a need to add equities to the portfolio Source: Bloomberg, Internal. Past performance is not indicative of future returns. 4

Adding equities in small proportion can help the portfolio 13% The chart shows the risk and returns characteristics for portfolios with varying debt and Risk equity Return allocation Characteristics

5 Adding equities in small proportion can help the portfolio 13% The chart shows the risk and returns characteristics for portfolios with varying debt and Risk equity Return allocation Characteristics for the last 3 years ( ) 12% 0% debt, 100% equity 11% 10% Return 9% 8% 7% 80% debt, 20% equity 90% debt, 10% equity 100% debt, 0% equity Adding little bit of equities to a pure debt portfolio, can help in generating risk-adjusted returns Low correlation between equity and debt asset can help to diversify risk Equities can help in generating alpha over the long term 6% 5% 4% 6% 8% 10% 12% 14% 16% Risk Source: ICRA MFIE. Equity is represented by Nifty 50 and debt is represented by Nifty 10 Yr benchmark Gsec Index. Risk is denoted by standard deviation of daily returns for the last 3 years. All values are annualized. Associated cost and expenses have not been taken into consideration. Past performance is not indicative of future returns. The above chart is for illustrative purposes only. 5

Asset Allocation Scenario Analysis Equity allocation: 15%, Debt allocation: 85% Equity allocation: 10%, Debt allocation: 90% Equity allocation: 5%, Debt allocation: 95% Annualized return on equity

6 Asset Allocation Scenario Analysis Equity allocation: 15%, Debt allocation: 85% Equity allocation: 10%, Debt allocation: 90% Equity allocation: 5%, Debt allocation: 95% Annualized return on equity component Annualized return on debt component Annualized return on equity component Annualized return on debt component Annualized return on equity component Annualized return on debt component 6.00% 7.00% 8.00% 9.00% -20% 2.89% 3.79% 4.69% 5.60% -10% 3.90% 4.79% 5.68% 6.56% 0% 5.14% 6.01% 6.88% 7.74% 10% 6.62% 7.46% 8.30% 9.15% 15% 7.45% 8.28% 9.11% 9.94% 6.00% 7.00% 8.00% 9.00% -20% 3.95% 4.88% 5.82% 6.76% -10% 4.61% 5.54% 6.46% 7.39% 0% 5.43% 6.34% 7.25% 8.17% 10% 6.41% 7.31% 8.20% 9.10% 15% 6.97% 7.85% 8.74% 9.63% 6.00% 7.00% 8.00% 9.00% -20% 4.98% 5.95% 6.92% 7.89% -10% 5.31% 6.27% 7.24% 8.20% 0% 5.72% 6.67% 7.63% 8.58% 10% 6.21% 7.15% 8.10% 9.05% 15% 6.49% 7.43% 8.37% 9.32% A measured equity allocation could boost overall performance at a moderate risk level Returns shown above are for investments held for 3 years without rebalancing. Expenses have not been considered. This is for illustrative purposes only. 6

7 Presenting, SBI Capital Protection Oriented Fund Series A (Plan 1) The scheme is oriented towards protection of capital and not with guaranteed returns. Further the orientation towards protection of capital originates from the portfolio structure of the scheme and not from any guarantee, insurance cove etc. 7

8 Product Information Investment Objective The scheme is a close-ended capital protection oriented scheme. The scheme endeavors to protect the capital by investing in high quality fixed income securities that are maturing on or before the maturity of the Scheme as the primary objective and generate capital appreciation by investing in equity and equity related instruments as a secondary objective. However, there can be no assurance or guarantee that the investment objective of the scheme will be achieved. The Scheme is oriented towards protection of capital and not with guaranteed returns. Further, the orientation towards protection of the capital originates from the portfolio structure of the scheme and not from any bankguarantee, insurance cover etc. Asset Allocation* Debt instruments (including debt derivatives) and Money market instruments (including Triparty Repo, Reverse repo) : 80% -100% Equity and equity related instruments (including derivatives and ETFs) : 0% - 20% Investment Strategy The Scheme endeavors to protect capital by investing a portion of the portfolio in highest rated debt securities & money market instruments and also to provide capital appreciation by investing the balance in equity and equity related securities. The debt and money market instruments would bring about the stability of returns in the scheme. The equity portion of the scheme will invest in diversified portfolio of Equities & Equity Related instruments. The fund will follow a mix of bottom-up & top-down approach to stock-picking. The Scheme will primarily focus on companies that have demonstrated characteristics such as market leadership, strong financials and quality management. The scheme is oriented towards protection of capital and not with guaranteed returns. It shall also be indicated that the orientation towards protection of capital originates from the portfolio structure of the scheme and not from any bank guarantee, insurance cover etc. * For detailed asset allocation please refer slide no 14 8

9 Capital Protection through Portfolio Orientation Capital protection orientation is expected to be achieved through investing in high credit quality debt securities The scheme would invest in AAA and equivalent rated corporate papers, Gsec and SDLs predominantly The maturity of the debt security not to exceed the tenure of the scheme, thereby not undertaking any significant interest rate risks 9

10 Capital Protection through Portfolio Orientation contd Example of Capital Protection through Portfolio Orientation: Assumptions: Maturity of debt security reasonably matched with scheme s tenure Coupons reinvested at 4% p.a Assumed YTM of 3 years AAA rated bond is at 8.00% Thus for e.g., A bond with coupon of 9%, residual maturity of 3 years and face value of Rs 1000 is expected to be trading at Rs The effective return over 3 years will be approx. 7.69% By investing Rs at the beginning, we can expect it to grow to Rs 100 at the end of 3 years The remaining Rs can be invested into equities, after adjusting for the expenses and associated costs Key Risks to above assumptions and calculations: Partial or full Default of underlying securities Coupon reinvested at lower rates This is only an example to show how the protection of capital originates from the portfolio structure. Please consult your financial advisor before taking any decision of investment. Source: Bloomberg, Internal. The above illustration is for indicative purpose only. 10

11 Key Information Scheme Name SBI Capital Protection Oriented Fund Series A (Plan 1) Type of Scheme Fund Manager Benchmark Index Minimum Application Amount Plan / Options Exit Load Tenure of the scheme Rating Listing A close ended Capital Protection Oriented Scheme Mr. Rajeev Radhakrishnan ( for Debt portion) Mr. Ruchit Mehta (for equity portion) CRISIL Hybrid Conservative Index Rs. 5000/- in multiples of Re.1 thereafter Direct / Regular. The plan will have Growth option only. N.A. Since the Scheme will be listed on Stock Exchange there will not be any Exit Load Days The Schemes portfolio structure has been rated CARE AAAmfs (SO) by CARE Ratings Ltd. The rating given by CARE Ratings Ltd. would be reviewed on a quarterly basis as required under SEBI Circular dated SEBI/IMD/CIR No. 9/74364/06 dated August 14, The Units under the Scheme will mandatorily be listed on NSE. Further, the AMC may at its discretion list the units on any Stock Exchange. 11

12 Who is this fund suitable for? Conservative investors investing in traditional savings instruments First time mutual fund investors. First time equity investors. Investors in small savings schemes Senior citizens, retired persons 12

13 Tax Efficiency 3 years + investment horizon Illustration - how indexation over the long term offers tax efficiency Particulars Capital Protection Oriented Fund Traditional Avenue (with Indexation benefits) 10% tax 20% tax 30% tax slab slab slab A Amount Invested 1,00,000 1,00,000 1,00,000 1,00,000 B Term of Investment (in days) 1,200 1,200 1,200 1,200 C Investment Yield 8.00% 8.00% 8.00% 8.00% D Maturity Value^ = A*(1+C)^(B/365) 1,28,791 1,29,747 1,29,747 1,29,747 E Initial Cost of Investment 1,00,000 1,00,000 1,00,000 1,00,000 F Indexed Cost of Investment* = (A/240)*280 1,16,667 NA NA NA Taxable Capital Gains = D-F (Cap Pro), D-A G (Fixed Deposit) 12,125 29,747 29,747 29,747 H Applicable Tax Rate# 20.80% 10.40% 20.80% 31.20% I Amount of Tax = G*H 2,522 3,094 6,187 9,281 J Maturity Value (Post Tax) = D-I 1,26,269 1,26,654 1,23,560 1,20,466 K Absolute Returns (Post Tax) 26.27% 26.65% 23.56% 20.47% L CAGR Investment Yield (Post Tax) 7.35% 7.45% 6.65% 5.83% Actual returns may vary based upon prevalent market conditions and rates. Please consult your tax advisor for actual tax implications. ^Quarterly Compounding has been taken for Traditional avenues. *Cost Inflation Index (CII) is based on the year of investment and that of the year of redemption i.e and respectively and the rates used are actual rates prescribed by Income Tax authorities for these years. # For Term Deposit - including 4% Health and Education cess. # For Capital Protection Oriented Fund -20% with indexation & including 4% Health and Education cess. The above is only an example to show the method of calculating capital gain tax payable by an investor with indexation and should not be construed to be an investment or tax advice of any nature. There is no assurance or guarantee of future performance of any scheme of SBI Mutual Fund. The calculation is based on prevailing tax laws. Please consult your tax/financial advisor before taking any decision of investment. Year wise Cost Inflation Index (CII) : , , , ,

14 Asset Allocation Details Indicative Asset Allocation (% of total assets) Instruments Minimum Maximum Risk Profile (High/Medium/Low) Debt instruments (including debt derivatives) and Money market instruments (including Triparty Repo, Reverse repo) 80% 100% Low to Medium Equity and equity related instruments (including derivatives and ETFs) 0% 20% High The Scheme may invest in securitized debt up to 40% of the net assets of the scheme. The Scheme may invest in Repo in corporate debt as permitted by SEBI. The scheme shall not engage in short selling. The Scheme may engage in stock lending up to 10% of its net assets. The cumulative gross exposure through equity, debt and derivative position will not exceed 100% of the net assets of the scheme. The scheme may invest in ADRs/GDRs issued by Indian Companies, subject to the guidelines issued by Reserve Bank of India and Securities Exchange Board of India. The gross exposure to derivatives in the equity segment shall be restricted as per the individual equity asset allocation tables mentioned above. Moreover, it may be noted that the Debt derivatives would be used only for hedging and portfolio rebalancing. 14

Product Labeling This product is suitable for investors who are seeking* A close-ended Capital Protection oriented fund medium to long term Investment in fixed income instruments to protect

15 Product Labeling This product is suitable for investors who are seeking* A close-ended Capital Protection oriented fund medium to long term Investment in fixed income instruments to protect capital and investment in equity and equity related instruments for capital appreciation *Investors should consult their financial advisors if in doubt whether this product is suitable for them. 15

16 Disclaimer Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This presentation is for information purposes only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. These views alone are not sufficient and should not be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions and estimates included here constitute our view as of this date and are subject to change without notice. Neither SBI Funds Management Private Limited, nor any person connected with it, accepts any liability arising from the use of this information. The recipient of this material should rely on their investigations and take their own professional advice SBI Funds Management Private Limited (A joint venture between SBI and AMUNDI) Registered Office: 9th Floor, Crescenzo, C-38 & 39, G Block, Bandra Kurla Complex, Bandra (E), Mumbai Board line: Fax: Website Call: customer.delight@sbimf.com SMS: SBIMF to Visit Visit 16

Flow of the Presentation

Flow of the Presentation Characteristics of Equity & Debt Investor Requirement Hybrid Funds Benefit from Dual Advantage SBI Dual Advantage Fund Series XXVI Disclaimer Characteristics of Equity & Debt %