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Most individuals' primary concern when investing in mutual funds is capital protection. Capital protection funds offer the dual benefit of capital protection and the potential to earn higher returns. However, these funds do not offer guaranteed returns. This article talks about the various aspects of capital protection funds, including what are capital protection funds, how they work, features, benefits, etc.
These are close-ended hybrid mutual funds that are oriented towards protecting your capital from any type of market risk by balancing the exposure to both debt and equity. Such a fund is known as a capital protection fund. The portfolio of such funds largely focuses on debt funds and invests in debt instruments like t-bills, highly rated bonds, certificates of deposits, and other fixed-income securities that ensure capital protection along with assured maturity returns.
The primary objective of these funds is to reduce the impact of economic downturns by focusing on fixed-income securities and debt instruments. This strategy aims to protect investors' capital while potentially yielding annual appreciation on their investment.
Investors' funds are divided between equities and debt securities. Approximately 80-90% of the assets are placed in debt, while the remaining portion is directed towards equities. The allocation in debt ensures that investors can reclaim their initial investment when the investment matures. Meanwhile, the investment in equities aims to generate higher returns compared to those typically offered by Bank Fixed Deposits.
For example, if an investor puts ₹1000 into a capital protection fund, the fund manager will allocate ₹900.09 into a debt instrument yielding 10% interest at maturity. This allocation guarantees the recovery of the principal investment over the scheme's duration. The remaining amount is invested in equity instruments to potentially boost returns and thereby enhance the investment's value.
Capital protection funds offer various benefits. Given below are some of them -
Below mentioned are the special characteristics of capital protection funds -
The choice of investing in capital protection funds or not depends on his/her risk preferences and financial goals. You should consider investing in capital protection funds in the following cases -
Capital protection funds are the ideal choice for those who can lock in their funds for a period of one year, three years, or five years and want to get the benefit of both capital protection and capital appreciation. Capital protection funds for 5 years also offer tax-saving opportunities as its returns are taxed at a concessional rate.
If you are looking for more such tax-saving options or have a tax-related query, you can reach out to our tax experts. Book Tax Consultation Now!
The lock-in period for Capital Protection Funds typically includes three maturity options: 1-year, 3-year, and 5-year periods. Investors are only able to redeem their investment once the specified maturity period has elapsed.
Capital-protected products are ideal for investors who are extremely cautious about risks and intend to retain the product until maturity without being willing to tolerate any losses beyond the guaranteed repayment amount.
The primary objective is to safeguard investors' capital from market declines while enabling them to capitalize on market upswings for potential capital growth. Bonds with guaranteed returns provide investors with exposure to the stock market, offering the opportunity for higher returns while also serving as a protective measure.
The function of a lock-in period differs based on the type of investment but generally aims to secure commitment, deter short-term trading, and encourage long-term investment behavior. Upon the expiration of the lock-in period, investors obtain the flexibility to withdraw funds or exit their investments without facing penalties or limitations.
A capital protection-oriented fund falls under the category of closed-end hybrid funds. Its main aim is to protect investors' capital during market downturns while also offering opportunities for capital growth by participating in the upward movements of the equity market.
Capital protection refers to the extent to which the invested capital is safeguarded at the end of the investment term. In a scenario where the certificate is 100% capital-protected, the investor is guaranteed to receive at least 100% of the nominal value at the conclusion of the term.
