Nikhil Walavalkarmoneycontrol.com
How is the idea of investing in equities without putting your capital at risk, especially at a time when equity markets are extremely volatile and CNX Nifty has lost 6% this month? New fund offers of closed ended hybrid funds can help you just that. Five fund houses DWS, HDFC,ICICI Prudential, Reliance and SBI have lined up such schemes that offer to invest in combination of equity and debt. “These products are meant for investors with low risk appetite and want to invest in equities with a three year view,” says D.P. Singh, chief marketing officer, SBI Mutual Fund.
These schemes come with three or five year timeframe. Asset allocation of the scheme is such that the investment in bonds ensures that the investors at least get their capital back.
Investment in equities bring in that much needed returns kicker. For example, a three year scheme typically invests 80% of the money in bonds that mature in line with the maturity of the scheme and rest in equities. Towards the end of three years bonds mature and with interest ensure return of capital.
Returns given by equity investments decide the returns investors get over and above return of capital. Investors can expect returns in excess of fixed deposits from such schemes. DSP BlackRock Dual Advantage Fund - Series 1 - 36 Months launched in February 2012, has so far offered 14.31% returns, whereas Reliance Dual Advantage Fixed Tenure Fund II- plan A launched in February 2012, has offered 14.62% returns.
“Equity markets are in a correction mode, however growth drivers of Indian economy are in place and one can see a good upside over three years,” says Rakesh Goyal, national head – distribution, Bonanza Portfolio. He advises low risk investors to capitalize on the current weakness in equity markets by investing in capital protection oriented funds.
Though the structure of these hybrid funds are aimed at protecting capital, not all are labeled as capital protection oriented funds. Capital protection oriented funds restrict bond investments to AAA rated instruments whereas rest can look at AA rated bonds issued by companies with sound fundamentals to boost returns. AAA rated bonds offer lower rate of interest as compared to AA rated bonds.
This makes schemes labeled as capital protection oriented funds to invest more money in bonds to ensure return of capital as compared to schemes allowed to invest in AA rated bonds. Those who want to give some headroom to the fund manager to boost returns can look at funds that are not explicitly labeled as capital protection oriented funds, rest can choose to go with capital protection oriented funds.
Though the idea of investing in equities without compromising on the safety of your capital looks good, there are some limitations of these schemes. These being closed ended schemes; you have to remain invested till the maturity of the scheme. Though units of these schemes are listed on the stock exchange they are rarely traded at fair value. You have to keep in mind that these schemes are treated like a debt fund for the computation of tax. If you hold on to these schemes for more than three years, gains realized from these schemes are treated as long term gains which are taxed at 20% post indexation.
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