A STUDY ON CAPITAL PROTECTION SCHEMES OFFERED BY MUTUAL FUND R.Uppily MBA., M.Phil. MBM, CAIIB, AIII, PGDILM - Research Scholar M.Hariharasudhan B.E.,MBA(Tech.Mgmt.).,BGL.,MSc(Psych.).,MSW.,PGDCL.,PGDIPR., MSc(Envirn. Science) Research Scholar ABSTRACT Themainobjectiveofthestudyistostudy whether the Capital protection funds offered by the mutual fund asset management companies are worth to invest. The researcher has used the secondary data for this study. The study tries to analyse the objective of the capital protection funds, do they really protect capital or provide assurance for capital. Capital protection schemes rolled out during the period 2006 to 2015 are taken for the study. The returns generated by schemes is analysed and the same is compared with other products like fixed deposit, fixed maturity plans and Monthly income plans. Looking at the results, it is observed that it is better to approach a financial planner and invest in a self-constructed portfolio which can generate better returns when compared to the CPO schemes KeyWords:CPO, FD, MIP, FMP,NAV,CAGR, Absolute return Introduction Safety of capital is an important aspect for every investment,considering this aspect people park most of their money in bank fixed deposits (FDs). Though, a smarter option would be to explore other opportunities that are available before taking a final call. Product manufacturers understand the investor psychology very well. They are aware that everyone is afraid of losing money on investments. So they come up with their innovation in the form of Capital protection oriented funds (CPO). The word capital protection is enough to attract the attention of Investors. There are many mutual fund companies launching Capital protection fund series and collects a handsome sum as investment corpus. But does it really make sense to invest in such funds or investors taking a wrong decision based on the name of the fund? Let s understand in detail What is capital Protection fund? Capital protection funds are close-ended mutual fund schemes which typically invest 75% - 80% of their assets in debt and the rest in equity and equity related instruments. They belong to the category of Hybrid close ended funds (A mix of debt and equity). Debt portion is invested in such a way that it returns the Capital invested and equity portion provides the necessary opportunity growth to investments. These close ended funds come with tenure of 3 or 5 years. www.apjor.com Page 24
Investment Objective of the fund The Investment Objective of Capital protection oriented funds says To seek capital protection by investing in high quality fixed income securities maturing in line with the tenure of the scheme and seeking capital appreciation by investing in equity and equity related instruments. These funds promise capital protection but don't offer a guarantee. SEBI rules prevent a fund from doing so. The tenure of debt securities in which capital-protection funds invest cannot be more than these funds' tenure. Because the securities are held till maturity, the risk of a fall in prices during the holding period due to interest rate changes is nil, making these fund less volatile. A Comparison between CPO / FMP / FD CPO FMP FD Amount invested in Debt as well as equity instruments Only in Debt intruments Funds are used by Banks in which FD is taken Maturity Close ended and Maturity is predefined Close ended and Maturity is predefined Predefined tenure Exit On maturity; if earlier can be traded in stock exchange On maturity; if earlier can be traded in stock exchange Pre mature exit allowed but lower rate Returns Return is not fixed Return is not fixed Fixed return Tax LTCG is taxed at 10 per cent without indexation and 20 per cent with indexation LTCG is taxed at 10 per cent without indexation and 20 per cent with indexation In case of dividend option is selected in CPO and FMP, Dividend is tax free in the hands of the investor. But dividend schemes have to pay tax there by the return percentage will drop when compared to growth option. Tax Advantage If the investment in debt funds is held for a three or more years (as per the latest tax amendment), the gain from the fund would be classified as Long term capital gains(ltcg). LTCG for debt scheme is taxed at are taxed at 10 per cent without indexation and 20 per cent with indexation (Indexation is adjusting the purchase price for inflation). How capital protection funds have performed An Analysis Applicable at income tax slab rate There are so far 148 funds have come out in the name of Capital protection fund / CPO with growth option (note dividend and direct options not considered) from the year 2006 to 2015. Out of this 47 funds have matured and 101 funds are yet to mature. Mutual fund name Matured Open Total ICICI Prudential Mutual Fund 9 41 50 Birla Sun Life Mutual Fund 10 15 25 Sundaram Mutual Fund 12 4 16 HDFC Mutual Fund 10 10 UTI Mutual Fund 2 5 7 Axis Mutual Fund 3 2 5 Canara Robeco Mutual Fund 1 4 5 LIC Nomura Mutual Fund 5 5 Union KBC Mutual Fund 5 5 SBI Mutual Fund 3 1 4 BOI AXA Mutual Fund 3 3 IDFC Mutual Fund 3 3 BNP Paribas Mutual Fund 2 2 Franklin Templeton Mutual Fund 2 2 HSBC Mutual Fund 2 2 Tata Mutual Fund 2 2 Deutsche Mutual Fund 1 1 JPMorgan Mutual Fund 1 1 Total 47 101 148 www.apjor.com Page 25
Returns generated by scheme that are matured Out of the 47 schemes that are matured, The Post tax return of the schemes ranges from 0.21% to 13.34%. The snap shot of the same is as below. Out of the 47 schemes 28% of the schemes have delivered less than 7% return Scheme Name AMC name No of Days Pre Tax CAGR Pre Tax ABS Post Tax CAGR Axis Capital Protection Oriented Fund - Series 1 (3 Years) - Growth Axis Mutual Fund 1156 14.82 54.93 13.34 Axis Capital Protection Oriented Fund - Series 3 (3 Years) - Growth Axis Mutual Fund 1116 14.25 50.26 12.82 Axis Capital Protection Oriented Fund - Series 2 (3 Years) - Growth Axis Mutual Fund 1141 14.01 50.67 12.61 Birla Sun Life Capital Protection Oriented Fund - Series 7 - Growth Birla Sun Life Mutual Fund 1118 13.68 48.09 12.31 ICICI Prudential Capital Protection Oriented Fund - Series IV - 36M - Growth ICICI Prudential Mutual Fund 1125 11.78 40.96 10.60 Birla Sun Life Capital Protection Oriented Fund - Series 8 - Growth Birla Sun Life Mutual Fund 779 10.38 23.47 9.34 ICICI Prudential Capital Protection Oriented Fund - Series III - 36M - Growth ICICI Prudential Mutual Fund 1158 9.16 32.04 8.24 ICICI Prudential Capital Protection Oriented Fund II - Series VI - 24M - Growth ICICI Prudential Mutual Fund 761 9.01 19.71 8.11 Sundaram CPO Fund - Series 7-3 Yrs - Growth Sundaram Mutual Fund 1128 8.73 29.53 7.86 ICICI Prudential Capital Protection Oriented Fund II - Series VII - 24M - Growth ICICI Prudential Mutual Fund 759 8.71 18.97 7.84 SBI Capital Protection Oriented Fund - Series III - Growth SBI Mutual Fund 1152 8.67 29.99 7.80 Sundaram CPO Fund - Series 6-3 Yrs - Growth Sundaram Mutual Fund 1117 8.61 28.76 7.75 Sundaram BNP Paribas CPO Fund - Series I - 3 Years - Growth Sundaram Mutual Fund 1141 8.52 29.13 7.67 ICICI Prudential Capital Protection Oriented Fund II - Series XII - 12M - Growth ICICI Prudential Mutual Fund 384 8.44 8.90 7.60 ICICI Prudential Capital Protection Oriented Fund II - Series VIII - 24M - Growth ICICI Prudential Mutual Fund 748 8.39 17.95 7.55 Sundaram CPO Fund - Series 5-3 Yrs - Growth Sundaram Mutual Fund 1118 8.26 27.52 7.43 ICICI Prudential Capital Protection Oriented Fund - Series II - 24M - Growth ICICI Prudential Mutual Fund 755 8.16 17.62 7.35 ICICI Prudential Capital Protection Oriented Fund II - Series XI - 12M - Growth ICICI Prudential Mutual Fund 380 8.03 8.37 7.22 Sundaram CPO Fund - Series 4-3 Yrs - Growth Sundaram Mutual Fund 1116 7.88 26.09 7.09 ICICI Prudential Capital Protection Oriented Fund - Series I - 24M - Growth ICICI Prudential Mutual Fund 755 7.65 16.47 6.88 Canara Capital Protection Oriented Fund - Series 1-36M (Plan A) - Growth Canara Robeco Mutual Fund 1120 7.51 24.87 6.76 Sundaram CPO Fund - Series 4-2 Yrs - Growth Sundaram Mutual Fund 751 7.37 15.75 6.63 Franklin Templeton Capital Protection Oriented Fund - 3 Years - Growth Franklin Templeton Mutual Fund 1147 7.32 24.87 6.59 UTI Capital Protection Oriented Scheme- Series I - 3 Years - Growth UTI Mutual Fund 1154 7.05 24.04 6.35 Sundaram CPO Fund - Series 1-2 Yrs - Growth Sundaram Mutual Fund 753 6.98 14.93 6.28 Sundaram CPO Fund - Series 3-3 Yrs - Growth Sundaram Mutual Fund 1119 6.97 22.94 6.27 Birla Sun Life Capital Protection Oriented Fund - Series 4 - Growth Birla Sun Life Mutual Fund 1114 6.93 22.69 6.24 Franklin Templeton Capital Protection Oriented Fund - 5 Years - Growth Franklin Templeton Mutual Fund 1878 6.91 41.05 6.22 Sundaram CPO Fund - Series 3-2 Yrs - Growth Sundaram Mutual Fund 751 6.69 14.25 6.02 UTI Capital Protection Oriented Scheme- Series I - 5 Years - Growth UTI Mutual Fund 1883 6.59 39.00 5.93 Sundaram CPO Fund - Series 2-2 Yrs - Growth Sundaram Mutual Fund 752 6.45 13.74 5.80 DWS Capital Protection Oriented Fund - Growth Deutsche Mutual Fund 1148 6.41 21.56 5.76 Birla Sun Life Capital Protection Oriented Fund - Series 6 - Growth Birla Sun Life Mutual Fund 776 6.21 13.66 5.58 Sundaram CPO Fund - Series 2-3 Yrs - Growth Sundaram Mutual Fund 1120 5.80 18.89 5.22 IDFC Capital Protection Oriented Fund - Series I - Growth IDFC Mutual Fund 1133 5.53 18.17 4.97 JPMorgan India Capital Protection Oriented Fund - Growth JPMorgan Mutual Fund 1210 5.50 19.40 4.95 Birla Sun Life Capital Protection Oriented Fund - 5 Years - Growth Birla Sun Life Mutual Fund 1870 5.38 30.78 4.84 IDFC Capital Protection Oriented Fund - Series II - Growth IDFC Mutual Fund 1127 5.22 17.01 4.70 Birla Sun Life Capital Protection Oriented Fund - 3 Years - Growth Birla Sun Life Mutual Fund 1140 5.17 17.06 4.65 Sundaram CPO Fund - Series I - 5 Yrs - Growth Sundaram Mutual Fund 1872 5.03 28.63 4.53 Birla Sun Life Capital Protection Oriented Fund - Series 1 - Growth Birla Sun Life Mutual Fund 875 4.92 12.19 4.42 Birla Sun Life Capital Protection Oriented Fund - Series 3 - Growth Birla Sun Life Mutual Fund 1114 4.62 14.77 4.16 IDFC Capital Protection Oriented Fund - Series III - Growth IDFC Mutual Fund 1155 4.61 15.33 4.15 Birla Sun Life Capital Protection Oriented Fund - Series 2 - Growth Birla Sun Life Mutual Fund 1146 4.48 14.76 4.03 SBI Capital Protection Oriented Fund - Series I - Growth SBI Mutual Fund 1893 3.84 21.59 3.46 SBI Capital Protection Oriented Fund - Growth SBI Mutual Fund 1612 3.40 15.93 3.06 Birla Sun Life Capital Protection Oriented Fund - Series 5 - Growth Birla Sun Life Mutual Fund 850 0.23 0.55 0.21 www.apjor.com Page 26
Comparative Study Let us now do a comparative study between the Capital protection fund launched in April 2012 and FD invested in April 2012 and the comparison date for maturity as 31 st March 2015. Let us now see the capital protection funds that have been launched in April 2012 & May 2012 and their NAV as on 31 st march 2015. There are 5 schemes launched during this period and have generated a post-tax CAGR between 7.22 to 11.98 % SCH_NAME MUT_NAME ISS_DATE Face value 31 mar 2015 NAV CAGR Post Tax CAGR ICICI Prudential Capital Protection Oriented Fund II - Series XI - 12M - Growth ICICI Prudential Mutual Fund 4/10/2012 10 10.837 8.03 7.22 ICICI Prudential Capital Protection Oriented Fund II - Series XII - 12M - Growth ICICI Prudential Mutual Fund 5/24/2012 10 10.8898 8.44 7.60 Tata Capital Protection Oriented Fund - Series II - Growth Tata Mutual Fund 5/16/2012 10 13.1045 9.86 8.88 Tata Capital Protection Oriented Fund - Series I - Growth Tata Mutual Fund 5/16/2012 10 13.4639 10.90 9.81 ICICI Prudential Capital Protection Oriented Fund II - Series IX - 36M - Growth ICICI Prudential Mutual Fund 5/14/2012 10 14.33 13.31 11.98 Let us take an example that a person invest Rs 5,00,000 in a CPO launched above and a FD FD CPO - Low CPO - High Amount Invested 500000 500000 500000 Month of investment Apr-12 Apr-12 Apr-12 Maturity value 643399 541850 716500 Return % 8.50% 7.22% 11.98% Tax 30% 10% 10% Post tax return 5.95 6.50 10.78 The CPO (Low is the 7.22% return scheme and CPO High is 11.98% return scheme). There is a clear indication that because of tax advantage the Post tax return is high in terms of CPO. But there is no security of assured return in terms of COP when compared to FD.Note : CPO return is not assured and depends on its performance whereas FD return is assured Conclusion Should the investment is in capital protection oriented funds? Investor should always take decision keeping the goal in mind;there are many actively managed funds in the mutual funds space which have potential to deliver better returns than Capital protection oriented funds. Then the taxation structure does not attract much, Investor can generate more returns by self-designing such portfolio. Those who are in lowest tax bracket may would get lesser returns than the bank Fixed deposits. This way they will not lose on liquidity front also. The capital protection funds are being pitched as an alternate for fixed deposit, If you feel that you want to find an alternate to fixed deposit you can do so by investing in an FMP or an MIP (monthly income plan) offered by mutual funds. In fact MIP has a better liquidity and active fund management. Since there is 'no guarantee' in the legal sense it is better to do a own portfolio with mixture of funds to protect capital rather than investing in capital protection funds. Example of a Self Constructed portfolio Let us take an example investor has Rs 15,00,000 for investment on April 2012 which he is trying to invest in 3 products5,00,000 in FD and 5,00,000 in a MIP plan and 2,00,000 in a balanced plan www.apjor.com Page 27
Let us take the MIP plan as HDFC Monthly income plan Long term Plan Growth option. This fund invests 75 to 80% in Debt and remaining in equity and HDFC Balanced Growth option. This fund invests 70 to 75% in Equity and remaining in Debt. HDFC MIP Fund NAV as on April 1 2012 was 24.26 and on 31 st march it is 34.58 and HDFC Balanced fund NAV as on April 1 2012 was 58.47 and on 31 st march it is 107.45 Now lets us compare between a self-constructed portfolio andicici Prudential Capital Protection Oriented Fund II - Series IX - 36M Growthlaunched in April / May 2012 which has given a post-tax return of 11.98% Self constructed Portfolio CPO FD HDFC MIP HDFC Balanced Total ICICI CPO Amount Invested 500000 700000 300000 1500000 Amount Invested 1500000 Month of investment Apr-12 Apr-12 Apr-12 Month of investment Apr-12 Maturity value 643399 997774 551308 2192481 Maturity value 2149500 Return % 8.50% 12.54% 22.49% 13.49% Return % 11.98% Tax 30% 10% 0% Tax 10% Post tax return 5.95 11.29 22.49 12.22 Post tax return 10.78 Post tax amount 2119684 Post tax amount 2084550 2500000 2119684 2084550 2000000 1500000 1000000 Investment Value 500000 0 SCP CPO Data clearly shows that self-constructed portfolios based can beat the CPO schemes return.further, since there is no assurance of protection of capital these schemes are not highly different from the MIP schemes Suggestions It is always advisable to approach a Financial Advisor and work out a financial plan before investing. Also investor must not be carried away by the fancy names provided in the scheme. They must read the objective of the scheme and the investment schema before investing. Reference 1. AMFI India website 2. BSE INDIA website 3. Mutual fund companies websites 4. Mutualfundsindia.com www.apjor.com Page 28