Mutual Fund Unlocked: Capital Protection Oriented Schemes

Capital protection-oriented schemes (CPOS) are a type of closed-ended funds that majorly invest in debts or fixed income securities. These are the hybrid schemes that invest in both debt and equities. The tenure of these closed-ended schemes is generally 3-5 years. The aim of this type of fund is to protect the principal amount and along with additional gains if any.

According to the SEBI guidelines, CPOS need to be rated by a registered rating agency so as to ascertain if they can provide the capital protection to investors. This rating needs to be reviewed every quarter and decide the type of paper the funds can invest in. If a fund has got a rating of AAA, they need to invest in papers having AAA rating.

Asset Allocation

Since CPOS are hybrid funds, they invest both in debt and equity. Allocation among debt and equity is determined in such a way that investment in debt funds grow to the principal amount by the end of the tenure of funds. Therefore, if Rs. 100 is the total corpus of a fund and assuming a normal interest rate of 6.8 per cent p.a, the fund can invest Rs. 80 in debts that will grow to Rs. 100 at the end of the tenure of funds. Remaining Rs. 20 is invested in equity. Depending upon the growth or de-growth witnessed in the equity part of the fund, overall performance of the fund will be determined. For example, for a three-year fund, if equity part of the funds grows by 20 per cent CAGR, the overall growth of the fund will be 34.56 per cent. As debt portion will be 100 and equity portion will be 34.56.

Best Suited For

This type of schemes is best suited for risk-averse investors for whom capital protection comes first. This is also useful to those investors who do not want to take interest rate risk and hence try to lock-in the current interest rate by investing in CPOS. You can also use this to realise your certain goal whose investment horizon matches with tenure of CPOS.