This action might not be possible to undo. Are you sure you want to continue?
invested will be returned to the investor irrespective of the movements in the market over the stipulated period. Besides, the investor can get a healthy appreciation in case NAVs of the funds rise by that time. It is widely known that such mutual funds are investing the bulk of their assets in bonds and debt instruments and the rest into equities, hoping for some capital appreciation. The SEBI order had also said that the mutual fund portfolio, under the scheme, must be rated by a SEBI registered credit rating agency. Over a year ago, with much hype and hoopla, mutual funds in India added another product to their bouquet ² capital protection funds. Franklin Templeton Mutual Fund and UTI Mutual Fund launched the first such schemes in October and December 2006, respectively, and a few other fund houses followed them. After the initial euphoria, now it looks like the plot has got lost somewhere. It has been a while since the industry last witnessed the launch of a new capital-protection oriented scheme. Capital protection-oriented funds¶ structure µprotects¶ capital invested when the scheme matures. While the schemes¶ assets are invested in rated debt securities, investors could also get a portion of their investment returns linked to the equity market for capital appreciation. These schemes are generally three- or five-year close-ended schemes and work best for risk averse investors.
Investor who seeks a high level of security without risks yet wishes to profit from positive stock market developments? Then the Capital Protected Fund is exactly right for them. The focus of this investment fund is security and guaranteed capital performance of the investment at the end of the fund's lifetime.
Capital protection fund is a mutual fund scheme that promises to protect your initial investment and gives better returns than a bank fixed deposit and other guaranteed products on offer. They target the need for safety of initial investment that has so far kept conservative investors out of the MF ambit and to provide returns attractive enough to lure them away from guaranteed return products.
The performance of existing monthly income plans and hybrid debt oriented schemes show that funds are capable of generating superior returns with a high degree of safety. However, investors need to read the fine print on the protection of capital, liquidity, expected returns and risks before committing to these schemes.
Capital protection schemes promise that at least the minimum amount, which has been invested, will be returned to the investor irrespective of the movements in the market over the stipulated period. Besides, the investor can get a healthy appreciation in case NAVs of the funds rise by that time. It is widely known that such mutual funds are investing the bulk of their assets in bonds and debt instruments and the rest into equities, hoping for some capital appreciation. The SEBI order had also said that the mutual fund portfolio, under the scheme, must be rated by a SEBI registered credit rating agency. Capital protection funds are very popular in West. However, when SEBI first came out with the guidelines for such schemes, there was widespread skepticism. After all, most investors who wanted a protection of their invested capital would be better off investing in bank fixed deposits. How it works: At maturity you receive the highest market value achieved during the lifetime of the fund.
The "guaranteed maximum market value" at maturity of the fund applies to all fund units,
irrespective of when you purchased them or their value at purchase. The "guaranteed maximum market value" of fund units is never lower than their value at the time of purchase. If you buy back the units before the maturity date, the guarantee does not apply, and you redeem your fund units at the current market value. When you invest in a mutual fund, you know that its NAV will be subject to market volatility, and there's no way a fund can assure you the safety of your capital or promise you dividends. But now, amended SEBI guidelines will allow MFs to launch capital protection schemes. But this won't really make a difference to you. Here's why.
A Capital Protection-oriented Scheme (CPS) will have to be a three-year, closed-end scheme. Redemption of units before maturity will not be allowed. SEBI is silent on whether these schemes can get listed on the stock exchanges. Assume, out of Rs 100, a CPS invests Rs 80 in a debt paper (three-year AAA-rated corporate paper yielding 8.75 per cent). The balance Rs 20 is invested in equities. While Rs 80 grows to around Rs 102 in three years, thereby protecting your capital, the Rs 20 equity investment can grow to Rs 30.4, assuming equities return 15 per cent compounded over three years. A CPS today would, therefore, yield a compounded return of around 8.6 per cent, post-tax and expenses (1.5 per cent assumed) in three years. The 8 per cent NSC locks your money for six years, while the PPF imposes a 15-year lock-in. CPS will be rated by a credit rating agency on its investment structure and ability to protect capital. And that's the root of it. MFs will protect--not guarantee--the capital. So, you can't take the fund to court if it fails to guarantee your capital, because it's merely protecting it. Sandesh Kirkire, CEO, Kotak Mutual, says: "A mutual fund is not designed to guarantee capital. What a CPS will do is have such a blend of equity and debt instruments that the chances of capital erosion are minimal." So, remember the distinction between protection and guarantee and get into the product only if you can take the uncertainty. The list of scheme-specific risk factors makes it clear that FTCPF is oriented towards protection of capital and there is no scope for guaranteed returns.
Also, the orientation is derived from the portfolio structure and not from any bank guarantee or insurance cover. In fact, the ability of the portfolio to ensure capital protection on maturity may well be impacted by interest rate movements and credit defaults. Besides, there are factors such as trading volumes, liquidity and settlement systems to consider. The rating agency's assessment is not a comment on its NAV in relation to the face value, it is pointed out Simple capital protection-oriented funds such as these ensure capital protection by investing a substantial portion of the corpus in high-quality debt at all points in time. The debt component is sized such that its redemption value at the time of maturity of the scheme will be equal to or greater than the amount invested by the investors. In sizing the debt corpus, CRISIL has factored in the default risk of debt securities, the reinvestment risk of interim cash flows and the tenor risk arising on account of the inability to fully invest the fund`s corpus for the same time frame as that of the fund. The CPF satisfies a felt need among Indian investors for an investment avenue that allows participation in the stock markets without the accompanying worries of capital erosion. The scheme will enable investors to benefit from the upside potential of equity investments without subjecting their capital to market-related volatility. Though a good product for first-time mutual fund investors, we believe that this fund has a place in the portfolio of all investors as all of us park some proportion of our savings in relatively safe investment avenues." "The fund's hybrid structure and its ability to preserve capital are well-suited to current market conditions, where both the debt and equity markets have been displaying heightened volatility "The equity portion of this fund will be managed in a flexible investment style designed to take advantage of opportunities across the market capitalization range."
Simple capital protection-oriented funds such as these ensure capital protection by investing a substantial portion of the corpus in high-quality debt at all points in time. The
debt component is sized such that its redemption value at the time of maturity of the scheme will be equal to or greater than the amount invested by the investors. In sizing the debt corpus, CRISIL has factored in the default risk of debt securities, the reinvestment risk of interim cash flows and the tenor risk arising on account of the inability to fully invest the fund`s corpus for the same time frame as that of the fund. COMPUTATION OF NAV The Net Asset Value (NAV) per Unit of the Scheme will be computed by dividing the net assets of the Scheme by the number of Units outstanding on the valuation day. The Mutual Fund will value its investments according to the valuation norms, as specifi ed in Schedule VIII of the SEBI (MF) Regulations, or such norms as may be specifi ed by SEBI from time to time. The Net Assets Value (NAV) of the Units under the Scheme shall be calculated as shown below: NAV (Rs.) = Market or Fair Value of Scheme¶s Investments + Current Assets including Accrued Income Current Liabilities and Provisions No. of Units outstanding under Scheme on the Valuation Day The NAV shall be calculated up to four decimal places. However, the AMC reserves the right to declare the NAV up to additional decimal places as it deems appropriate. The AMC will calculate and disclose the fi rst NAV of the Scheme within a period of 10 (ten) Business Days from the date of closure of New Fund Off er period. Subsequently, the NAV will be calculated and disclosed on all the Business Days. ASSET ALLOCATION PATTERN Under normal circumstances, the asset allocation of the Scheme would be as follows:
Instruments Indicative allocations ( % of total assets) Minimum / Maximum Debt* and Money Market Instruments 80 / 100 High/Medium/Low Low to medium Risk Profile
subject to provisions of SEBI circular dated August 18. the AMC may park the funds of the Scheme in short term deposits of the Scheduled Commercial Banks. The Scheme will not invest in securitized debt. the asset allocation pattern . investment in derivatives. the Scheme may hold cash. Subject to the SEBI (MF) Regulations. Further debt component of the portfolio will have highest investment grade rating. The Scheme shall not deploy more than 20% of its net assets in securities lending. 2010 w. subject to the guidelines issued by SEBI vide its circular dated April 16.Equity and Equity Related Instruments 0 /20 High Note: The Scheme will invest only in such debt securities which mature on or before the maturity of the Scheme. The cumulative gross exposure through debt. The maximum gross derivative position will be restricted to 50% of the net assets of the Scheme. The Scheme may use derivatives only for purposes of hedging and portfolio rebalancing. as may be amended from time to time. From time to time. In addition to the instruments stated in the table above. Pending deployment of the funds in securities in terms of investment objective of the Scheme. A part of the net assets may be invested in the Collateralised Borrowing & Lending Obligations (CBLO) or repo or in an alternative investment as may be provided by RBI. the Scheme may enter into repos/reverse repos as may be permitted by RBI. 2007.r. equity and derivative positions shall not exceed 100% of the net assets of the scheme.t. The Scheme may engage in short selling of securities in accordance with the framework relating to short selling and securities lending and borrowing specifi ed by SEBI.
Equity Related Instruments are securities which give the holder of the security right to receive Equity Shares on pre agreed terms. These proportions can vary substantially depending upon the perception of the fund manager. equity warrants. the price of which is directly dependent upon (i. Derivatives involve the trading of rights or obligations based on . 3. The fund manager will restore asset allocation in line with the asset allocation pattern within 1 month. convertible preference shares. Equity derivatives are fi nancial instrument. WHERE WILL THE SCHEME INVEST? The corpus of the Scheme will be invested in debt & money market instruments. It includes convertible bonds. convertible debentures. µderived from¶) the value of equity shares or equity indices. keeping in view market conditions. the intention being at all times to seek to protect the interests of the Unit holders. 2. equity derivatives etc. market opportunities. It must be clearly understood that the percentages stated above are only indicative and not absolute. It is issued to those who have contributed capital in setting up an enterprise.e. applicable regulations and political and economic factors. Equity & Equity Related Instruments and other permitted securities which will include but not limited to: Equity and Equity Related Instruments: 1. Further. generally traded on an exchange.. Change in the investment pattern for defensive considerations will be in the interest of unit holders and for short term only.indicated above may change from time to time. Equity share is a security that represents ownership interest in a company. the fund manager may alter allocation during subsequent deployment of funds provided deployment is generated out of appreciation in value of existing investments.
the buyer pays premium (fee) to the seller. strike price of the option and the volatility of the underlying asset. The seller on the other hand has the obligation to buy or sell specifi ed asset at the agreed price and for this obligation he receives premium. The premium is determined considering number of factors such as the market price of the underlying asset/security. Currently. but do not directly transfer property. the futures are settled in cash. For acquiring this privilege. 2 months and 3 months on a rolling basis.The option that gives the buyer the right to buy specifi ed quantity of the underlying asset at the strike price is a call option.the underlying. without the obligation. to buy or sell a specifi ed asset at the agreed price on or upto a particular date. The fi nal settlement price is the closing price of the underlying stock(s)/index. the exchange specifi es certain standardized features of the contract. There is an agreement to buy or sell a specifi ed quantity of fi nancial instrument on a designated future date at a price agreed upon by the buyer and seller at the time of entering into a contract. number of days to expiry. risk free rate of return. SEBI has permitted futures contracts on indices and individual stocks with maturity of 1 month. The futures contracts are settled on last Thursday (or immediately preceding trading day if Thursday is a trading holiday) of each month. 4. Option is a contract which provides the buyer of the option (also called holder) the right. To make trading possible. Derivatives: Futures are exchange-traded contracts to sell or buy fi nancial instruments for future delivery at an agreed price. The buyer of the call option (known as the holder of . A futures contract involves an obligation on both the parties to fulfi ll the terms of the contract. Option contracts are of two types viz: Call Option .
The seller of the put option (one who is short Put) however. The seller (writer of the option) on the other hand has the obligation to sell the underlying asset if the buyer of the call option decides to exercise his option to buy. Certifi cate of Deposits (CDs) is a negotiable money market instrument issued by scheduled commercial banks and select .call option) can call upon the seller of the option (writer of the option) and buy from him the underlying asset at the agreed price at any time on or before the expiry of the option. In case investment is made in instrument with maturity beyond the maturity of the Scheme. Further debt instruments in the portfolio will have highest investment grade rating.The right to sell is called put option. The fi rst is the European Option which can be exercised only on the maturity date. The second is the American Option which can be exercised on or before the maturity date. then such instrument will have a put option date (before the maturity date of the Scheme) and will be compulsorily exercised by the AMC. The Scheme will not invest in debt instruments (other than money market instruments) where the maturity of the debt instrument is more than 3 months prior to the maturity of the Scheme. has the obligation to buy the underlying asset at the strike price if the buyer decides to exercise his option to sell. 9 Debt & Money Market Instruments: The Scheme will invest only in such debt securities which mature on or before the maturity of the Scheme. 1. Put Option . There are two kind of options based on the date of exercise of right. A Put option gives the holder (buyer) the right to sell specifi ed quantity of the underlying asset at the strike price.
maturity is between one year to 3 years from the date of issue. Securities created and issued by the Central and State Governments as may be permitted by RBI. The maturity period of CDs issued by the Banks is between 7 days to one year. securities guaranteed by the Central and State Governments (including . It is in electronic form. 182 days and 364 days. 1 Lac thereafter. primary dealers and all India Financial Institutions as an alternative source of short term borrowings. T-bills are issued at a discount to their face value and redeemed at par. CP is traded in secondary market and can be freely bought and sold before maturity. T-Bills are issued for maturities of 91 days. Treasury Bills (T-Bills) are issued by the Government of India to meet their short term borrowing requirements. 1 Lac and in multiples of Rs. 5. Collateralised Borrowing and Lending Obligations (CBLO) is a money market instrument that enables entities to borrow and lend against sovereign collateral security. Commercial Paper (CPs) is an unsecured negotiable money market instrument issued in the form of a promissory note. 3. Central Government securities including T-bills are eligible securities that can be used as collateral for borrowing through CBLO. 2. The maturity ranges from 1 day to 90 days and can also be made available upto 1 year. Banks/ FIs can not buyback their own CDs before maturity. The minimum denomination of CD should be Rs. in case of FIs. generally issued by the corporates. CDs may be issued at a discount to face value.all-India Financial Institutions that have been permitted by the RBI to raise short term resources. They are issued at a discount to the face value as may be determined by the issuer. 4. whereas.
These instruments include fi xed interest security with/without put/call option. These instruments may be secured against the assets of the company or may be unsecured and are generally issued to meet the short term and long term fund requirements. zero coupon bond. fi xed interest rate with put/call option.but not limited to coupon bearing bonds. with coupon reset periodically. zero coupon bonds. Frequency of the interest payment could be either monthly/ quarterly/half-yearly or annually. public and private sector banks. State government. The periodicity of reset could be daily. zero coupon bonds and treasury bills). Non convertible debentures as well as bonds are securities issued by companies / institutions promoted / owned by the Central or State Governments and statutory bodies. 6. monthly. rating. capital indexed bonds. They form part of Government¶s annual borrowing programme and are used to fund the fi scal defi cit along with other short term and long term requirements. half yearly and . State Government securities are issued by the respective State Government in co-ordination with the RBI. quarterly. Rate of interest on such instruments would depend upon spread over corresponding Government security. tenor etc. fl oating rate bonds. corporates. which may or may not carry a Central/State Government guarantee. perceived risk. Central Government securities are sovereign debt obligations of the Government of India with zero-risk of default and issued on its behalf by RBI. fi xed interest security with staggered maturity payment etc. Floating rate debt instruments are debt instruments issued by Central government. All India Financial Institutions. 7. PSUs etc. Private Sector companies. fl oating rate bonds. Such securities could be fi xed rate.
G-Secs. The transaction results in collateralized borrowing or lending of funds. State Government securities and T-Bills are eligible for Repo/Reverse Repo. at par with other market participants. Transaction in a security on µWhen Issued¶ basis shall be undertaken in the following manner. SEBI has on April 16. it is Repo transaction whereas from the perspective of buyer who buys the security with an agreement to sell it at a later date. Presently in India. 9. Short term debt consideration for this Scheme includes maintaining an adequate fl oat to meet expenses and other liquidity needs. When the seller sells the security with an agreement to repurchase it. All ³when issued´ transactions are on an ³if´ basis. 8. 2008. it is reverse repo transaction. µWhen. to be settled if and when the actual security is issued. WI trading takes place between the time a new issue is announced and the time it is actually issued. in principle allowed Mutual Funds to undertake µWhen Issued (WI)¶ transactions in Central Government securities. µWI¶ transactions can be undertaken in the case of . The fund manager will have the fl exibility to invest the debt component into fl oating rate debt securities in order to reduce the impact of rising interest rate in the economy.annually or any other periodicity as may be mutually agreed between the issuer and the Fund. as and if issued¶ (commonly known as ³when-issued´ (WI)) security refers to a security that has been authorized for issuance but not yet actually issued. Repo (Repurchase Agreement) or Reverse Repo is a transaction in which two parties agree to sell and purchase the same security with an agreement to purchase or sell the same security at a mutually decided future date and price.
i. At the time of settlement on the date of issue. In other words non-PD entities can sell the µWI¶ security to any counterparty only if they have a preceding purchase contract for equivalent or higher amount. in the case of reissued securities. Only PDs can take a short position in the µWI¶ market. µWI¶ transactions would commence on the issue notifi cation date and it would cease on the working day immediately preceding the date of issue.. Long Position. µWI¶ originating transaction may be undertaken only on NDS-OM. on a selective basis. undertaking the cover leg of the µWI¶ transactions is permitted even outside the NDS-OM platform. Open Position in the µWI¶ market are subject to the following limits: 10 Category Reissued Security Newly Issued Security Non-PDs Long Position. However. not exceeding 5 percent of the notifi ed amount. The transaction should be guaranteed by an approved Central counterparty namely Clearing Corporation of India Limited (CCIL). . trades in the µWI¶ security will be netted off with trades in the existing security.securities that are being reissued as well as newly issued. not exceeding 5 percent of the notifi ed amount. All µWI¶ transactions for all trade dates will be contracted for settlement on the date of issue. through telephone market.e.
cash payments based on fi xed/ fl oating and fl oating rates are made by the parties to one another. 11. 14. 12. Bills Rediscounting. Any other domestic debt securities as permitted by SEBI/RBI from . Any other Scheme of Religare Mutual Fund or of any other mutual fund provided such investment is in conformity with the investment objective of the Scheme. the funds may be parked in short term deposits of the Scheduled Commercial Banks. cash payments based on contract (fi xed) and the settlement rate. on each payment date that occurs during the swap period. for a specifi ed period from start date to maturity date. 13. Forward Rate Agreement . Accordingly. Interest Rate Swap . subject to guidelines and limits specifi ed by SEBI. are made by the parties to one another. Accordingly. on the settlement date.An Interest Rate Swap (IRS) is a fi nancial contract between two parties exchanging or swapping a stream of interest payments for a ³notional principal´ amount on multiple occasions during a specifi ed period. Forward Rate Agreement and such other derivative instruments as may be permitted under the Regulations. Pending deployment of funds as per the investment objective of the Scheme. Derivative Instrument like Interest Rate Swaps. Such contracts generally involve exchange of a ³fi xed to fl oating´ or ³fl oating to fi xed rate´ of interest. Such investment will be subject to limits specifi ed under SEBI (MF) Regulations and AMC will not be entitled to charge management fees on such investments.A Forward Rate Agreement (FRA) is a fi nancial contract between two parties to exchange interest payments for a µnotional principal¶ amount on settlement date. The settlement rate is the agreed bench-mark/ reference rate prevailing on the settlement date.10.
primary dealers.26. 2010 (Source: CCIL). The debt market comprises broadly two segments. privately placed. with market capitalization of Rs. secured.443 Crores as on December 2008 (Source: Economic Survey.53. viz. The Government securities (G-sec) market. 18. rights off ers. unlisted. The Indian debt market is the largest segment of the Indian fi nancial markets. other government bodies. unsecured and maturing normally in line with the maturity of the Scheme. 21. pension funds and corporates.16.time to time. bonds and other fi xed income securities will be in instruments which have been assigned investment grade rating by the credit rating agency. Further investments in debentures. outstanding securities and trading volumes. banks and corporates. 14. fi nancial institutions. The securities / instruments mentioned above and such other securities that the Scheme is permitted to invest in would be rated and could be listed. The latter is further classifi ed as market for PSU bonds and private sector bonds. negotiated deals. mutual funds. is the oldest and the largest component of the Indian debt market in terms of market capitalization.658 Crores as at March 31. insurance companies. private placement. The G-Secs market plays a vital role in the Indian economy as it provides . The outstanding dated securities of the Government of India is Rs. 2009-2010).. trusts. The major players in the Indian debt markets today are banks. Government securities market or G-Sec market and corporate debt market. secondary market. Debt and Money Markets in India The Indian debt market is today one of the largest in Asia and includes securities issued by the Government (Central & State Governments). Government and Public Sector Enterprises are the predominant borrowers in the markets.774 Crores as on December 2009 as compared to Rs. fi nancial institutions. public sector undertakings. The securities may be acquired through initial public off ering (IPOs).
686 Crores vis-à-vis Rs. infl ation indexed bonds. certifi cate of deposits (CDs. repo transactions (temporary sale with an agreement to buy back the securities at a future date at a specifi ed price). activity levels of the Government and non-government debt vary from time to time.e. The money markets in India essentially consist of the call money market (i. The corporate bond market. there have been new products introduced by the RBI like zero coupon bonds. insurance companies. etc. the key money market players are banks. fi nancial institutions. issued by banks) and Treasury Bills (issued by RBI). is only an insignifi cant part of the Indian debt market. 2009-2010). commercial papers (CPs. market for overnight and term money between banks and institutions).42. fl oating rate bonds. A large part of the issuance in the non-Government debt market is currently on private placement basis. 2. In a predominantly institutional market. generally issued by corporates). short term unsecured promissory notes. 88. Over the years. Instruments that comprise a major portion of money market activity include but not limited to: Overnight Call Collateralised Borrowing & Lending Obligations (CBLO) Repo/Reverse Repo Agreement Treasury Bills Government Securities with a residual maturity of < 1 year. The total traded volume in corporate bonds during April-December 2009 was Rs.the benchmark for determining the level of interest rates in the country through the yields on the government securities which are referred to as the risk-free rate of return in any economy. in the sense of private corporate sector raising debt through public issuance in capital market. mutual funds. In money market.750 Crores during April-December 2008. (Source: Economic Survey. Commercial Paper Certifi cate of Deposit . primary dealers and corporates.
To this. Though not strictly classifi ed as money market instruments. are actively traded and off er a viable investment option. company selection. industry. the fundamentals of the companies that are part of the universe. there are some other options available for short tenure investments that include MIBOR linked debentures with periodic exit options and other such instruments. we add our top down economic views and industry views - . The following table gives approximate yields prevailing on February 7. However. We use external research and fi nd it useful as a source of information and fi nancial models. we believe our direct and indepth interaction with a company and its competitors. STOCK SELECTION PROCESS Based on the fund objective. These yields are indicative and do not indicate yields that may be obtained in future as interest rates keep changing consequent to changes in macro economic conditions and RBI policy. 2011 on some of the instruments. bottom up. Matrix Analysis As part of the Matrix approach we analyze. helps us arrive at our own unique insight into the company. The process involves company. industry and asset allocation. The fund¶s investment objective has implications for defi nition of the universe. suppliers and buyers-wherever feasible and possible. PSU / DFI /Corporate paper with a residual maturity of < 1 year. The maximum ineffi ciency in the markets is at the company level and an in-depth research eff ort can generate a knowledge advantage and superior performance. we start fi ltering down the possible investment universe to more attractive opportunities. economic and technical analysis in alignment with the investment objective of the underlying fund.Apart from these.
EBITDA . The objective of our stock categorization system is to enable us to identify stocks that are likely to be the best investments from within our universe. Security Selection To help select stocks for the portfolio. The fi nancial parameters under stock selection process are explained as follows: Margin .Profi t after Tax / Net Worth Net worth . The economic and industry analysis also has its implications on company selection. but more importantly this enables fund managers to focus on the attributes that drive stock price performance and keep a watch for red fl ags.increasing trend in ROE over time Value of Asset or business .Equity share capital + Reserves ROE Expansion .PAT margin. . All of this is in keeping with the investment objective of the specifi c fund. ROE ± Return on Equity Stocks that fi t into one of these categories typically display superior return profi les. Each category of stock has a description of fundamental attributes that we expect the company to possess. taxes.Profi t after Tax . depreciation and amortization / Revenues .Earning before interest.Earnings before interest. taxes.Market or replacement value of the .EBITDA margin or PAT Margin . Technical analysis is another input for asset allocation decisions.EBITDA Margin .Profi t after Tax / Revenues Return on Equity (ROE) .leading to industry and asset allocation decisions. The categorizations are as follows: e * P2P ± Path to Profi t.PAT. depreciation and amortization. we use a proprietary stock categorization system.
Oversight The role of monitoring and reviewing is undertaken by the investment committee consisting of Chief Executive Offi cer.Sensitivity of Profi ts (EBITDA or PAT) to changes in unit price or total revenues Path 2 Profi t . but not limited to. Every investment decision we make is by keeping in mind the investment objective of the Scheme and how the security will aff ect the overall portfolio. industry or economy have changed or a company¶s competitive advantage appears to have deteriorated. if applicable are also taken into consideration. we also look into the current economic / industry views that impact industry and asset allocation decisions for the fund. In addition. Technical views which are relevant to asset allocation. Our preference is for companies with the characteristics as defi ned in our stock categorization framework. Portfolio Construction The fund manager has the primary responsibility for portfolio construction based on the investment objective of the Scheme.refers to the various levers such as. revenue mix.Sensitivity of margins to increase in revenues Profi t Leverage . It could also be a function of alternative opportunities being available at a more attractive valuation or an inability to justify prevailing valuations. Portfolio construction guidelines are laid down for each fund and reviewed on a need basis and otherwise regularly on a quarterly basis. asset sales. revenue growth. cost reduction. Sell Discipline We may sell a stock because the fundamentals of a company. discontinuing of a product/business. Head .assets after accounting for liabilities Operating Leverage . change in capital structure that a company might adopt to improve profi tability / reduce losses.
Equity Funds. 2) The Scheme shall not invest more than 30% of its NAV in money market instruments of an issuer. INVESTMENT RESTRICTIONS Pursuant to Regulations. The committee is empowered to establish internal norms such as industry allocation.Compliance & Risk and by any additional member which may be included/ nominated to the committee which meets on a periodic basis. treasury bills and collateral borrowing . 1992. which are rated not below investment grade by a credit rating agency.Fixed Income and Head . Provided that such limit shall not be applicable for investments in Government securities. which are rated not below investment grade by a credit rating agency authorized to 17 carry out such activities under the SEBI Act. specifi cally the seventh schedule and amendments thereto. registered with SEBI. Such investment limit may be extended to 20% of the NAV of the Scheme with the prior approval of the Board of Trustees and the Board of Asset Management Company. Head .. asset allocation etc for each fund and to monitor and review this on an ongoing basis. Provided further that investments within such limit can be made in the mortgaged backed securitised debt. Provided that such limit shall not be applicable for investments in Government securities. the following investment restrictions are currently applicable to the Scheme: 1) The Scheme shall not invest more than 15% of its NAV in debt instruments (irrespective of residual maturity period above or below one year) issued by a single issuer.
4) The Scheme shall not invest more than 10 per cent of its NAV in equity shares or equity related instruments of any company and in listed securities/units of Venture Capital Funds. 6) The Mutual Fund under all its Scheme(s) shall not own more than ten per cent of any company¶s paid up capital carrying voting rights. 8) The Scheme shall not make any investment in : i any unlisted security of an associate or group company of the sponsor. 3) The Scheme will not make investments in unrated debt instruments. wherever investments are intended to be of a long-term nature. 7) The Scheme may invest in other schemes of the Mutual Fund or any other mutual fund without charging any fees. 5) The Scheme shall not invest more than 10% of its NAV in unlisted equity shares or equity related instruments and in unlisted securities/units of Venture Capital Funds. or iii the listed securities of group companies of the sponsor which is in excess of 25% of the net assets.and lending obligations. 9) The Mutual Fund shall get the securities purchased transferred in the name of the Fund on account of the concerned Scheme. provided the aggregate inter-scheme investment made by all the schemes under the same management or in schemes under the management of any other asset management company shall not exceed 5% of the Net Asset Value of the Fund. or ii any security issued by way of private placement by an associate or group company of the sponsor. 10) Transfer of investments from one scheme to another scheme in the same Mutual Fund is permitted provided: i such transfers are done at the prevailing market price for .
take delivery of relevant securities and in all cases of sale. subject to the framework specifi ed by SEBI. 11) The Mutual Fund shall buy and sell securities on the basis of deliveries and shall in all cases of purchases. following the guidelines issued by Securities and Exchange Board of India (SEBI) for Capital Protection-Oriented Funds (CPFs). In September 2006. Provided further that sale of Government security already contracted for purchase shall be permitted in accordance with the guidelines issued by the Reserve Bank of India in this regard. Sebi's guidelines In August.quoted instruments on spot basis (spot basis shall have the same meaning as specifi ed by a Stock Exchange for spot transactions). and ii the securities so transferred shall be in conformity with the investment objective of the scheme to which such transfer has been made. to Franklin Templeton Capital Protection-Oriented Fund's three-year and five-year plans. market regulator Securities and Exchange Board of India issued guidelines permitting fund houses to launch "capital protection-oriented" schemes. deliver the securities: Provided that the Mutual Fund may engage in short selling of securities in accordance with the framework relating to short selling and securities lending and borrowing specifi ed by SEBI. Sebi says capital protection should arise from the way in which the portfolio is constructed and not from any guarantee by the asset management company or sponsor. CRISIL has assigned ratings to CPFs . Subsequently. 12) The Scheme shall not make any investment in any fund of funds scheme. Provided further that the Mutual Fund may enter into derivatives transactions in a recognized stock exchange. CRISIL assigned the country's first ever ratings on CPFs under the new guidelines.
but at the same time. CPFs offer a platform to risk-averse investors who wish to participate in upturns in the equity markets. . CRISIL expects more such funds to be launched in the Indian market. CPFs are attractive opportunities for investors who are looking to enhance yield on their portfolios through exposure to risky asset classes such as equity. Typically. with or without external support. In India. ensures protection of the original investment at the scheme's maturity. capital protection has to be ensured by the scheme's portfolio characteristics. given the benefits they offer to investors: these include participation in equity market upturns without the risk of losing the invested capital. which will be finalised after CRISIL receives the following: » Finalised offer document for the fund » Regulatory approval for the fund » A set of warranties to be furnished by the AMC launching the fund » » » » Structure of CPFs SEBI's regulation pertaining to CPFs Methodology CRISIL's surveillance process for CPFs Structure of CPFs CPFs are funds where the structure of the scheme. The ratings on CPFs indicate the degree of certainty regarding timely payment of the face value of the units to unit holders on maturity of the scheme.launched by other asset management companies (AMCs) as well. CRISIL rates CPFs on its structured obligation (so) scale. The rating is not a comment on the scheme's net asset value (NAV) in relation to the face value of the scheme's units at any time before their redemption. and yet seek assurance on the protection of principal. third party protection (such as a guarantee or insurance cover) is currently not permitted. the rating process involves the assignment of a provisional rating. The CPF's structure and the performance of the debt and equity markets are factors that determine the returns on investments. not suffer erosion in the value of the invested amount.
CRISIL will not change an assigned rating. CRISIL's surveillance process for CPFs CRISIL will monitor all outstanding CPF ratings on a continuous basis. This rating must be reviewed on a quarterly basis. For example. it will seek information from the respective AMCs in a pre-specified format. Another pre-condition to the launch of CPFs by AMCs is that the scheme's units be rated by a registered credit rating agency from the perspective of the portfolio's ability to protect the capital invested therein. and that AMCs should not repurchase units before the end of the maturity period. The modalityHow do these funds aim to provide capital protection? A portion of the fund is inve sted in debt instruments that would mature at the value of the initial investment at the time of redemption. The remaining Rs 20 is invested in securities that are expected to provide returns that make the . Using the information thus obtained. whose maturity value is Rs 100. these schemes have to be closed-end. As long as the probable degree of safety of the principal at maturity remains in line with that witnessed when the rating was assigned. As part of this exercise." SEBI stipulates that CPFs launched be close-ended. so investors can invest only at the time of the new fund offer and can redeem only on the completion of its term. out of Rs 100. Rs 80 may be invested in an interest-paying debt instrument or zero-coupon bonds.SEBI's regulation pertaining to CPFs SEBI has issued detailed guidelines pertaining to the launch of CPFs in India. CRISIL may seek information at a shorter frequency if the situation so warrants. on a monthly basis. Debt investments in the case of CPFs must be in the highest-rated investment grade papers. and of the investors getting their money back in full. SEBI defines a capital protection-oriented scheme as "a mutual fund scheme which is designated as such and which endeavours to protect the capital invested therein through suitable orientation of its portfolio structure. It also requires that the scheme be rated by a credit rating agency on the ability of the fund to protect the initial investment and to be periodically reviewed on its continued ability to do so. it will analyse the probability of the portfolio value falling below the initially-contracted principal value. Also.
if the multiplier is three. the advantage that fund houses would bring is the use of sophisticated tools such as constant proportion portfolio insurance and dynamic portfolio insurance to apportion and manage funds between less risky assets and risky assets. This is something that an investor can easily replicate by parking the funds in. The closed-end nature of these schemes gives the fund manager the defined period benefit for making investments in debt instruments which ensure protection.investment proposition attractive. Unlike the example above. a post office monthly income scheme and investing the monthly interest in the equity market. the investor needs to keep in mind certain issues before being carried away by the capital protection bit. Does this mean that investors will lose money? Not likely. In other words. as far as possible. The protection is at risk only if the value of the portfolio falls below the floor. Buyer beware Capital protection funds are excellent tools for fund houses because they are able to tap into a source of funds that have so far been cornered by bank deposits or post office schemes. Rs 80. and this is monitored on a continuous basis with built-in triggers. the exposure to equity is leveraged with a defined multiplier. Capital protection funds are essentially closed-end funds. these schemes aim to protect your rupee investment and inflation is ignored. However. let us say. The other advantage is that investing in a mutual fund is more tax efficient than investing directly. wherein an investor . The credit rating that Sebi insists on will also provide an added level of security for the investor. They only need to ensure that. which is what the fund houses and distributors will emphasise on. Low liquidity. the investor's initial investment is safe. More importantly. the AMC isn't required to make up the difference in case of capital erosion. This means that even if you get the Rs 100 that you had invested. These are: No Guarantees. Sebi's guidelines do not require the fund house to give any guarantees. This would ensure that investors are able to reap maximum benefits by participating in an asset class that gives better returns without compromising on the safety of the capital invested. then Rs 60 (20x3) will go into equity and Rs 40 into risk-less assets. In the same example. where the investment in equity was restricted to the cushion of Rs 20. However. by structuring the portfolio in a way that ensures protection. effectively you have lost money because of the value erosion in the Rs 100 over the period.
as there can be no liquidity in the interim.000 x (1+8. is mulling listing on the stockmarket to give investors an exit option. be it need for liquidity. then the portion of the capital that will get invested in bonds would be around Rs.5 per cent.100. 79. leaving the balance Rs. So the portion invested in bonds "protects" your capital.5%)^3= 100. or poor performance by the scheme. what is a 'capital protected fund'? How does it work? And how beneficial is it for you? The Concept This works on a simple principle. which during maturity will be Rs. In fact. SEBI has given the nod for mutual funds to launch 'capital protection oriented schemes'. the investor needs extra space to have a long term.21.100. especially at times of market volatility These are 3-5 years closed ended funds. of course. To avoid this. Capital Protection Funds aim at preserving the capital invested in such funds. If you invest Rs.000 in such a fund with a 3-year maturity (SEBI has stated in its circular that all capital protected plans must be close-ended.000. when the issuer of a bond defaults. which means there is no exit and the investor has to hold till maturity). if the 3-year bond yield is 8.906).906 (i. a typical capital protected fund may just buy very few bonds of high quality (mostly government bonds). The major risk to your capital. Therefore. capital-protected funds also need to get a rating for the quality of the protection from a reputed rating agency. Capital Protection Funds represent that they preserve capital by taking lower risks.000 free to be invested aggressively to generate returns for you.e. For instance. Franklin Templeton Capital Safety Fund. The Unprotected Part . So. The first capital protection fund in India.can't exit during the life of the scheme for any reason. the fund will invest a major portion of your money in a basket of 3-year bonds. under which investors are assured of their investment (capital). is credit risk--that is.79.
The balance 10-20 per cent of your investment amount will typically find its way into equities (and derivative instruments in some cases). Since the investments are made in very safe instruments. in either case. the possibility of your earning more returns than the normal fixed income instruments is higher. Investors should not expect terrific returns from capital protected funds. but would want to aim a little higher than what they traditionally make from fixed income instruments. thereby protecting your capital. but with a 3-year to 5-year horizon. your capital is protected.79. But if the market is favourable. As can be seen. where Rs. Capital protected plans are ideal for investors who would want to ensure that their money is safe. one can be assured that the equity part will provide the necessary fillip while the capital remains protected. the returns are relatively low.906. The current 3-year yield for bonds is 8. The capital protection fund is similar to a close-ended debt scheme of a mutual fund.000 is invested in equities to earn market return (the tables below show the maximum & minimum return on a 3year basis). the impact on the overall return of the fund is limited and is dependent on the fund managers' ability to deliver higher returns. Your debt component grows back to Rs.000 of your investment is in debt and Rs 21. which will provide the returns in line with the market.21. Since only a small portion is invested in equities.000 is in equity. .50 per cent. The balance Rs. Let's get back to the above example.100. Returns in capital protection fund rely on fund manager It is mostly believed that investing in a capital protection fund is much safer when compared to the mutual funds.
implying low possibility of default. The taxing of capital protection funds is similar to debt mutual funds.000 were invested on 1st July 2008: (Value as on 20th January 2009) . The money left after the investment on the high quality fixed income instruments. Returns Comparison: Rs 10. the capital is gotten back along with the returns generated by equity. This ensures the money invested to be equivalent to the original sum invested in the capital protection fund. the returns on the investment are brought about by the equity. whichever is lower.In capital protection fund.3 percent without indexation or 20. Some situations may show up where if issuers of the high quality instrument default. then a scheme may show capital loss. The high quality fixed income instruments are the ones with high ratings. This means that the long term capital gains are taxed at 10. if the money remains invested till the scheme maturity period.6 percent with indexation. Under normal circumstances. the ratio of investing in these instruments is pre-determined. the fund manager invests your money in both equity and fixed income instruments. is put into equity. This gives little liquidity to the investor. The point to note here is that the result yielded by the capital protection fund is as good as the fund manager's ability to choose the right calls in equity. Although the capital protection scheme units are listed on stock exchanges. The fund manager puts the money in a high yielding instrument. they are not very frequently traded. as they are expected to mature in sync with the end of the scheme tenure. This raises the probability of getting your money back. With the fixed income instruments bringing back your capital. However. One should keep in mind that the fund does not guarantee your capital.
Though CPO funds have fallen less compared to BSE Sensex but have under performed when compared to debt funds (Birla Income Plus etc.236 236 2.1% 9.209 209 2. While capital protection funds represent themselves to be safe and secure with lower risk of capital loss.1% * CPO = Capital Protection Oriented Almost all the CPO Funds have underperformed their benchmark i.e.0% Franklin Templeton CPO Fund Franklin Templeton Capital Safety Fund Sundaram BNP Paribas CPO Fund Birla Sun Life Income Fund 10.905 -95 -0.4% 10.) When Compared with other fund types .FUND NAME Market Value (Rs) Absolute profit/loss (Rs) % Absolute Gain/Loss Birla Sun Life CPO* Fund 10. offer more liquidity and flexibility to investors. Recent performance suggests that debt funds are more stable compared to capital protection funds. CRISIL MIP Blended Index.9% 11. compared to a 3-5 year lock up in capital protection funds . their market performance during this volatile period has shown themselves to be quite risky. In addition.200 200 2.614 1614 16.
000 invested since September 1989 as at 28 February 2010 .): 5 Years (p.a.39% 1.52% 1.Investors shouldn't rush into capital protection funds because so far their performance has not turned out to be as represented.54 0.67% 2.a. Fund Performance as at 31 January 2011* Fund Size (m): 3 Months: 1 Year: 3 Years (p.): 7 Years (p. Investors are reminded that past performance is not necessarily indicative of future returns. (Since CPO Funds are recently launched. the performance of these funds at the time of redemption will be a better indicator of the returns delivered). Value of $10.a.36% * These figures are net of tax and annual management fees.): Since Inception: $4. except entry and exit fees which may vary between investors.69% 2.78% 4.
following the guidelines issued by Securities and Exchange Board of India (SEBI) for Capital Protection-Oriented Funds (CPFs). The ratings on CPFs indicate the degree of certainty regarding timely payment of the face value of the units to unit holders on maturity of the scheme. to Franklin Templeton Capital Protection-Oriented Fund¶s three-year and five-year plans. Typically. CRISIL expects more such funds to be launched in the Indian market. The rating is not a comment on the scheme¶s net asset value (NAV) in relation to the face value of the scheme¶s units at any time before their redemption. given the benefits they offer to investors: these include participation in equity market upturns without the risk of losing the invested capital. CRISIL has assigned ratings to CPFs launched by other asset management companies (AMCs) as well. Subsequently. CRISIL rates CPFs on its structured obligation (so) scale. which will be finalised after CRISIL receives the following: . the rating process involves the assignment of a provisional rating. CRISIL assigned the country¶s first ever ratings on CPFs under the new guidelines.CRISIL¶s Rating Criteria Capital Protection-Oriented Funds Background In September 2006.
They are: Static Hedge Dynamic Hedge Constant Proportion Portfolio Insurance (CPPI) and . but at the same time. There are four broad ways in which capital protection can be ensured. This rating must be reviewed on a quarterly basis. and that AMCs should not repurchase units before the end of the maturity period.´ SEBI stipulates that CPFs launched be close-ended. SEBI defines a capital protection-oriented scheme as ³a mutual fund scheme which is designated as such and which endeavours to protect the capital invested therein through suitable orientation of its portfolio structure. CPFs offer a platform to risk-averse investors who wish to participate in upturns in the equity markets. ensures protection of the original investment at the scheme¶s maturity. not suffer erosion in the value of the invested amount. and yet seek assurance on the protection of principal. Different structures in CPFs CPFs are schemes with underlying portfolios structured in such manner as to ensure capital protection to investors. third party protection (such as a guarantee or insurance cover) is currently not permitted. Another pre-condition to the launch of CPFs by AMCs is that the scheme¶s units be rated by a registered credit rating agency from the perspective of the portfolio¶s ability to protect the capital invested therein. The CPF¶s structure and the performance of the debt and equity markets are factors that determine the returns on investments.Finalised offer document for the fund Regulatory approval for the fund A set of warranties to be furnished by the AMC launching the fund Structure of CPFs CPFs are funds where the structure of the scheme. In India. CPFs are attractive opportunities for investors who are looking to enhance yield on their portfolios through exposure to risky asset classes such as equity. with or without external support. capital protection has to be ensured by the scheme¶s portfolio characteristics. Debt investments in the case of CPFs must be in the highest-rated investment grade papers. SEBI¶s regulation pertaining to CPFs SEBI has issued detailed guidelines pertaining to the launch of CPFs in India.
Investments in debt instruments are typically done on a held to maturity (HTM) basis. Globally. A higher erosion tolerance would mean lower initial equity. The remainder (i. capital protection is provided solely through the debt portfolio. Dynamic Hedge: Here. the difference between the capital raised and present value of the capital) is invested in equity. 100% erosion tolerance would equate this structure with the Static Hedge. the risk of default is mitigated. if any. Put simply. capital protection is provided through a mix of debt and equity.Dynamic Portfolio Insurance (DPI) This section describes the first two approaches. since the debt investments will be in fixed-income securities of very good credit quality. The extent of initial investment in equity and the erosion tolerance before switching entirely to debt are inversely correlated. Also. Appreciation in equity component. the debt portfolio invested matures to the capital value (initial consideration) at the end of the scheme. A combination of the maturity value of the debt portfolio and certain assured minimum equity component ensures capital protection. the transactions of most hedge fund-linked protection-oriented securities are structured using the CPPI model. Constant Proportion Portfolio Insurance (CPPI) Framework Constant Proportion Portfolio Insurance (CPPI) is a form of continuous dynamic hedging that was introduced by Fischer Black and Robert Jones of Goldman Sachs in 1986. in equity.e. In this case. The upside will however be higher in the case of leveraged static hedge than in the case of static hedge. CPPI is a popular. The downside (capital loss) will be nil in both cases if the scheme warranties are diligently adhered to. which could provide the possible upside to the fund. thereby avoiding the impact of market risk on account of interest rate movements. At the extreme. broadly-applicable and efficient model of portfolio insurance. Some key advantages of the model are that it does not involve investments in . An amount slightly lower than the present value of the protected principal is invested in debt and the remainder. constitutes additional returns to the scheme. The initial allocation to debt will be lower than in the case of static hedge. Static Hedge: Here. A covenant to switch back the entire equity allocation to debt on the breach of a pre-determined tolerance level is incorporated. while subsequent sections explain what CPPI and DPI are. contributions from the equity portfolio are required to ensure capital protection.
the scheme takes the shape of a capital protection-oriented fund. The quantum of exposure to be taken in the equity is computed by means of a multiplier (this indicates how many times the excess of wealth in the portfolio over a pre-defined floor level is invested in the risky asset).options. equity and debt. If the minimum payoff is taken as the initial investment. The portfolio¶s funds are thus constantly rebalanced (at daily/weekly/fortnightly intervals) to reflect the performance of the equity. The CPPI strategy allocates portfolio wealth between two assets. the floor increases gradually over the life of the fund to equal the minimum payoff at the time of maturity. a risky asset (taken to be equity investments for the purpose of this document) and a risk free asset (taken to be debt investments for the purpose of this document). This is expressed as Exposure to equity = M * (Portfolio Value ± Floor) Exposure to Debt = (Portfolio Value ± Exposure to Equity) Where Floor = Present Value of minimum guaranteed pay-off at maturity M = Constant Multiplier The strategy behind the CPPI model is not very complex. The CPPI strategy allocates a portfolio¶s exposure to equity at a constant multiple of the excess of wealth in the portfolio over a pre-defined floor level. specified payoff at maturity. and is relatively simple and easy to understand. is suitable for portfolios consisting of all types of marketable securities. As already discussed. The floor here is computed as the present value of a minimum payoff at maturity. convert the entire equity into risk-free debt investments up to an overall predetermined floor. The risky asset (consisting typically of equity) is expected to earn a higher rate of return than the risk free asset. The risk free asset (consisting typically of high-quality fixed income securities) is expected to earn an acceptable minimum. more of the portfolio is invested in this asset in an effort to take advantage of the rising asset values. If the equity declines in value. at short notice. the portfolio is rebalanced to reflect an increased weight in debt investments. which will grow over time to ensure the minimum. usually at least the risk-free rate. the portfolio of the scheme is split between two assets. The exposure to equity is always maintained at levels such that the fund manager can. Should the equity increase in value. .
Leveraging in CPPI Globally. the event when a Gap Risk occurs1). current regulations do not permit leveraging by funds and hence. when markets are volatile and higher. Broadly. the maximum exposure to equity will be restricted to the portfolio value of the fund. any improvement in the performance of the equities call for a movement of money back into equities basket: hence the term.e. owing to a fall in equity markets. allows the fund manager to dynamically change the multiplier (usually within a defined range). in the event of a sharp fall in the equity market. M could be low. that the fund can withstand without incurring a Gap Event (i. adequate levels of equity/risky assets are not available in the portfolio to be converted to debt/non-risky assets. Ignoring all other costs and risks. 1 Gap Risks occur when. The strategy allows for the application of leverage if the equity investment experiences strong returns. (1/M) represents the maximum erosion in the value of risky assets. The multiplier chosen should be based on the volatility in the value of the risky asset. (i. continuous dynamic hedging. and vice versa.e. say at 4.The multiplier assumes very high importance in the evaluation of a CPPI structure. when the markets are stable). a variant of CPPI. Dynamic Portfolio Insurance (DPI). the multiplier chosen by the AMC has the following implications: A high multiplier (M) implies a high initial investment in equities. CPPI structures use leverage (external borrowings) as a tool to maximise exposure to equities and offer potentially higher returns to investors. which will grow over the remaining life of the fund to ensure full capital protection at maturity . A fund investing in a low volatile risky asset could choose a higher M. and calls for deleveraging of the equity if it shows a loss. in India. The situation reverses with a lower multiplier. between two consecutive rebalancing dates. there is a greater likelihood of a Gap Risk materialising. If the equities perform poorly at any time during the life of the note. say at 2. While a high multiplier enables the investor to benefit from growth in the equity market. depending on the outlook on the volatility of the risky asset. assets are moved from equity to risk free asset. However.
In the case of CPFs. In the case of CGFs. capital is reallocated to the risk free assets. In all other situations. today. . the risky asset is converted into risk free asset so that the capital is protected at maturity. If performance is poor. the portfolio value is higher than the floor value. CPPI structures operate as Capital Guaranteed Funds (CGFs). on the other hand. always exists with the fund manager as long as the gap event does not occur. When a Near Gap Event2 occurs. SEBI permits no guarantee in India. Key risks that CRISIL considers while analysing CPPI-based structures? The key risks that CRISIL considers in analysing CPPI-based structures are the following: Gap risk: This refers to a situation when the portfolio value falls below the floor value. the AMC is bound to return the guaranteed amount to the investor if the structure fails to ensure capital protection ± such events may result when Gap Risks occur. This risk can be mitigated by sizing the maximum permissible equity portfolio (by restricting the multiplier µM¶ for the fund) based on stress tests on the past performance of equities. thereby protecting the capital.Capital-Guaranteed Funds (CGFs) and the key differences between CGFs and CPFs CGFs are a variant of CPFs with a guarantee feature embedded in the scheme. In its regulations on CPFs. Regardless of how the fund performs at the end of the maturity period. SEBI states that the orientation towards protection of capital should originate from the scheme¶s portfolio structure and not from any bank guarantee or insurance cover. The capital protection fails when a gap event occurs. Globally. The latter ensures that the option to switch the entire portfolio to risk free assets. the strategy is designed to make the entire capital active (invested in equities) from the outset and to remove capital from equities only if it has not appreciated well in excess of the cost of the guarantee. The CPF therefore has to be structured in such a manner that its portfolio constitution ensures protection of the original investment on the scheme¶s maturity. CRISIL believes that this clause in the regulations will restrain AMCs from launching CGFs in India. which effectively implies a de-leveraging of the underlying investment. The investment is usually structured with enough capital in such a way that the guarantee may be bought at any time through the term of the investment. This guarantee may also be provided by a third party on payment of a fee. the investor will therefore recover at least the guaranteed amount.
or if the debt instruments are not co±terminus with the scheme maturity. interim cash flows from interest-bearing debt instruments may be reinvested at a lower yield than the original yield. . reinvestment risks needs to be built in to the computation of the maximum permissible investment in equity (by appropriately raising the floor).Interest rate risk: Interest rates may vary over time. trading in debt may therefore involve losses due to interest rate fluctuations. Credit risks may be mitigated by ensuring that the debt instruments in the scheme are always of very high credit quality. Float risk: The structure may have a lower yield than projected if there are delays in deployment.¶ Reinvestment risk: As interest rates vary. However. based on past experience. A cushion for 2 This occurs when the portfolio value declines and comes close to the floor value but has still not reached the floor value. may lead to increased transaction costs. The fund manager needs to build a cushion for float risks. thereby getting automatically factored in the subsequent rebalancing. affecting reinvestment risk. Liquidity risk: Liquidity concerns can become impediments in the case of both debt and equity securities. This risk manifests in two forms: sudden change in interest rate affecting portfolio value and steady decline in interest rates. The former risk may be mitigated by appropriately considering a cushion for sudden interest rate movements. into the computation of the maximum permissible investment in equities. Transaction costs: Frequent churning between debt and equity on every rebalancing date. A cushion for liquidity risks needs to be built in to the analysis in the form of the impact cost of selling equity. at the start and maturity of the fund as well as float during rebalancing. Additional risks that CRISIL considers while analysing CPFs Other risks that CRISIL considers in analysing CPFs are the following: Credit risk: This refers to the risk of default of the debt instruments held in the portfolio. Current SEBI regulations also restrict CPFs from investing in debt instruments rated below µAAA. The latter is addressed below. this reflected periodically in the portfolio value.
sudden interest rate shocks and the credit quality of the fixed income securities. No part of this report may be reproduced in any form or any means without permission of the publisher. CRISIL does not guarantee the accuracy. For the highest degree of safety. Disclaimer CRISIL has taken due care and caution in preparing this report. As long as the probable degree of safety of the principal at maturity remains in line with that witnessed when the rating was assigned. it will analyse the probability of the portfolio value falling below the initially-contracted principal value. Contents may be used by news media with due credit to CRISIL Risk Factors Standard Risk Factors: . This will involve factoring in the highest degree of stress in terms of. Information has been obtained by CRISIL from sources which it considers reliable. CRISIL¶s surveillance process for CPFs CRISIL will monitor all outstanding CPF ratings on a continuous basis. adequacy or completeness of any information and is not responsible for any errors in transmission and especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this report. CRISIL can assign ratings lower than µAAA(so)¶ ratings by subjecting the parametric determinants of CPF structures to lesser shocks than those considered for µAAA(so)¶ rating.CRISIL can assign non µAAA(so)¶ ratings also for CPFs In CPF ratings CRISIL assesses the degree of safety of the originally invested principal. Using the information thus obtained. say. and of the investors getting their money back in full. the maximum erosion in value of equity between two rebalancing dates. on a monthly basis. CRISIL will not change an assigned rating. As part of this exercise. a µAAA(so)¶ rating will be assigned. CRISIL may seek information at a shorter frequency if the situation so warrants. However. it will seek information from the respective AMCs in a pre-specified format.
settlement risk. Past performance of the Sponsor/AMC/Mutual Fund does not guarantee future performance of the Scheme. the value of your investment in the Scheme may go up or down depending on various factors and forces aff ecting the capital markets. the orientation towards protection of capital originates from the portfolio structure of the Scheme and not from any bank guarantee. As the price / value / interest rates of the securities in which the Scheme invests fl uctuates. 1. insurance cover etc.Series I is the name of the Scheme does not in any manner indicate either the quality of the Scheme or its future prospects and returns. default risk including the possible loss of principal.000/. The risk associated with Equity and Equity Related Instruments.50.(Rupees One Lakh Fifty Thousand Only) made by it towards the corpus of the Mutual Fund. liquidity risk. fi xed income and money market instruments. The present Scheme is not a guaranteed or assured return scheme. investing in derivatives and securities lending are described below: Risk associated with Equity and Equity Related Instruments: Equity and Equity Related Instruments by nature are volatile and prone to price fl uctuations on a daily basis due to macro and micro economic factors. The Sponsor is not responsible or liable for any loss or shortfall resulting from the operations of the Scheme beyond the contribution of Rs. Religare Capital Protection Oriented Fund . Scheme Specifi c Risk Factors: The Scheme off ered is µoriented towards protection of capital¶ and µnot with guaranteed returns¶. Investment in Mutual Fund Units involves investment risks such as trading volumes. Further. The value of Equity and Equity Related .
a specifi c sector or all sectors. should there be a subsequent decline in the value of securities held in the Scheme¶s portfolio. the inability to sell securities held in the Scheme¶s portfolio may result. settlement periods may be extended signifi cantly by unforeseen circumstances. the Scheme¶s ability to sell these investments is limited by the overall trading volume on the stock exchanges. including debt securities. political. Equity and Equity Related Instruments listed on the stock exchange carry lower liquidity risk. The liquidity and valuation of the Scheme¶s investments due to its holdings of unlisted securities may be aff ected if they have to be sold prior to the target date of disinvestment. These securities may be illiquid in nature and carry a higher amount of liquidity risk. In certain cases.Instruments may fl uctuate due to factors aff ecting the securities markets such as volume and volatility in the capital markets. taxation laws. economic or other developments. which are not listed on the stock exchanges. Further. The Scheme may invest in securities. Similarly. at times. changes in law/policies of the Government. however. currency exchange rates. which may have an adverse impact on individual securities. Consequently. Risk associated with Fixed Income and Money Market Instruments: . in potential losses to the Scheme. The inability of the Scheme to make intended securities purchases due to settlement problems could cause the Scheme to miss certain investment opportunities. interest rates. the Equity and Equity Related Instruments are risk capital and are subordinate in the right of payment to other securities. the NAV of the Units issued under the Scheme may be adversely aff ected. in comparison to securities that are listed on the stock exchanges or off er other exit options to the investor.
Even where no default occurs. days to maturity. credit quality. However. the fl oating rate instruments having a periodical interest rate reset carry lower interest rate risk compared to a fi xed rate debt security. their prices are infl uenced by the movement in interest rates in the fi nancial system. Generally. In case of Government securities. demand and supply. in case of Government securities as credit risk remains zero. the returns on fl oating rate debt instruments may not be better than those on fi xed rate debt instruments. increase or decrease in the level of interest. In the case of fl oating rate instruments. The extent of rise or fall in the price is a function of existing coupon. Lower rated or unrated . the prices increase. an additional risk could arise because of the changes in the spreads of fl oating rate instruments. in the falling interest rate scenario. Diff erent types of securities in which the Scheme would invest carry diff erent types and levels of risk.Rate Risk Fixed Income and Money Market Instruments run interest-rate risk.Interest . there is minimal credit risk to that extent. With the increase in the spread of fl oating rate instruments. when interest rates rise. However. the price of a security may be aff ected because of change in the credit rating of the issuer/instrument and the price of a security goes down if the credit rating agency downgrades the rating of the issuer. the prices can rise. prices of existing fi xed income securities fall and when interest rate falls. the price can fall and with decrease in spread of fl oating rate instruments. Moreover. Credit Risk Credit risk or default risk refers to the risk that the issuer of a fi xed income security may default on interest payment or even in paying back the principal amount on maturity.
Re-investment Risk This refers to the interest rate risk at which the intermediate cash fl ows received from the securities in the Scheme including . Lower rated or unrated securities also tend to be more sensitive to economic conditions than higher rated securities. Further. Moreover. i. diff erent segments of Indian fi nancial markets have diff erent settlement cycles and may be extended signifi cantly by unforeseen circumstances. which may restrict the ability of the Scheme to sell such instruments. but the ability to sell these securities is limited by the overall trading volumes and may lead to the Scheme incurring losses till the security is fi nally sold. Securities which are not quoted on the stock exchange(s) may be illiquid and can carry higher liquidity risk in comparison with securities which are listed on the stock exchange(s) and off er exit option to the investor including put option. The Scheme would invest in the securities which are not listed but off er attractive yields.e. yield-to-maturity (YTM). The primary measure of liquidity risk is the spread between bid price and off er price quoted by a dealer. the securities that are listed on the stock exchange carry lower liquidity risk. Fixed income securities can be either listed on any stock exchange or may be unlisted. Liquidity or Marketability Risk This refers to the ease with which a security can be sold at or near to its valuation.securities are more likely to react to developments aff ecting the market and credit risk than the highly rated securities which react primarily to movements in the general level of interest rates. 3 While money market instruments are fairly liquid but lack a well developed secondary market. This may however increase the risk of the portfolio.
This may result . including the risk of failure of the other party. the proceeds may get invested at a lower rate. Such failure can result in the possible loss of rights to the collateral put up by the borrower of the securities. Investments in fi xed income securities may carry re-investment risk as interest rates prevailing on the interest or maturity due dates may diff er from the original coupon of the debt security. Consequently. Risks associated with Securities Lending As with other modes of extensions of credit. to comply with the terms of the agreement entered into between the lender of securities i.e. Short positions carry the risk of loosing money and these losses may grow unlimited theoretically if the price of the stock increases without any limit. Risks include risk of mispricing or improper valuation and the inability of the derivative to correlate perfectly with underlying assets. The Fund may not be able to sell such lent securities and this can lead to temporary illiquidity. rates and indices. Risks associated with Short Selling The Scheme may enter into short selling transactions. the inability of the approved intermediary to return the securities deposited by the lender and the possible loss of any corporate benefi ts accruing to the lender from the securities deposited with the approved intermediary. the Scheme and the approved intermediary. Risks associated with Investing in Derivatives Derivative products are specialized instruments that require investment techniques and risk analysis diff erent from those associated with stocks and bonds. in this case the approved intermediary. illiquidity risk whereby the Scheme may not be able to sell or purchase derivative quickly enough at a fair price. there are risks inherent to securities lending.maturity proceeds are reinvested. subject to SEBI and RBI Regulations.
The NAV of the Scheme will fl uctuate with changes in the market value of Scheme¶s holdings. At times. Risk Factors associated with Trading of Units on Stock Exchange(s) . . If numbers of short sellers try to cover their position simultaneously.The Units will be issued in demat form through depositories. The trading prices of Units of the Scheme will fl uctuate in accordance with changes in their NAV as well as demand and supply of the Units of the Scheme in the market. . In additions. short selling also carries the risk of inability to borrow the security by the participants thereby requiring the participants to purchase the securities sold short to cover the position even at unreasonable prices. it may lead to disorderly trading in the stock and thereby can briskly escalate the price even further making it diffi cult or impossible to liquidate short position quickly at reasonable prices. the participants may not be able to cover their short positions if the price increases substantially.Although Units of the Scheme are to be listed on the Exchange. trading in Units of the Scheme is subject to trading halts caused by extraordinary market volatility and pursuant to Exchange and SEBI µcircuit fi lter¶ rules. trading in Units of the Scheme is not advisable. .in major loss to the Scheme.Trading in Units of the Scheme on the exchange may be halted because of market conditions or for reasons that in view of exchange authorities or SEBI. There can be no assurance that the requirements of Exchange necessary to maintain the listing of Units of the Scheme will continue to be met or will remain unchanged. .The Units of the Scheme may trade above or below NAV. In addition. there can be no assurance that an active secondary market will develop or be maintained.
Capital guaranteed or principal protected funds may have a legitimate role to play in the investment strategy of an investor with a short time horizon. but due to the proximity of retirement cannot tolerate the potential downside that equity market exposure brings. . using the MSCI World Index product discussed earlier. Of course. one important issue to consider is the expected return over the term of the product and how this relates to either the CPF Ordinary Account rate or the Special Account rate. In the case of the MSCI World Index product discussed above. Again. if the investor thinks the Index will rise over that period. An example of this may be an investor close to retirement who wants to have some participation in equity market upside. all things being equal.As the Units allotted under the Scheme will be listed on the Exchange. capital guaranteed or principal protected funds enable investors to almost take a bet both ways. this type of product enable the investor to express that view. For CPF members looking to invest in a capital guaranteed or principal protected product. repurchase of Units by the Mutual Fund on the Maturity Date / Final Redemption Date will depend upon the confi rmations to be received from depository(ies) on which the Mutual Fund has no control. for an investor who thinks the MSCI World Index may rise over the next three years. Some Things to Consider In these uncertain times. the Mutual Fund shall not provide for redemption / repurchase of Units prior to Maturity Date / Final Redemption Date of the Scheme. then the investor will be much better off to buy a global equity fund than a capital guaranteed fund since the full benefit of the upside will be obtained. depending from where you withdraw your investment.The records of the depository are fi nal with respect to the number of Units available to the credit of Unit holder. Settlement of trades. .
This is the reason that the . the CPF Ordinary Account and Special Account rates could increase over the term of the product since it needs to be recognised that the current rates are as low as they can go. While these funds provide an element of comfort for investors. During the interim period inflation could impact the purchasing power. When it comes to the question of safety of capital there are capital protection funds that now operate in the country. For instance. This can be a period of 3 years or even 5 years. the hurdle rate would rise to at least 8% per annum. These hurdle rates recognise that the product only has a 50% participation in the upside of the MSCI World Index ± the hurdle rates also don¶t take into account the impact of the sales charges that may be incurred in making the initial investment. Investors should also make sure they understand the general terms of the product.the MSCI World Index would need to rise by at least 5% per annum over the threeyear product to leave the investor with a better return than would have been obtained had the investor left the amount in the CPF Ordinary Account and earned 2. The funds provide for protection on the downside. along with the possibility of some gain in case of favourable conditions in the equity market. Things to take note of in capital protection funds Look around and there is a mutual fund for all kind of investors¶ need. there are a few things that need to be considered: Inflation effect: The first thing that the investor has to consider is the inflation effect. is your original investment into the product actually guaranteed or is the capital just ³preserved´ only by the design of the product. This is necessary because there is a time gap since the initial investment actually took place and when the fund will return the money.5% per annum. Of course. For the Special Account. Is the guarantee provided in Singapore dollars or is it in some other currency? It pays to read the fine print.
This actually represents the amount of the earnings that are available for the individual if they do not take any risk and then park their money into these safe instruments. Matching returns: When the investor looks at the returns from the capital protection funds they should not consider these in relation to just the return of the capital.5 per cent to 9.5 per cent while other debt options would earn higher. This is because of the fact that there are several other options where there can actually be some earning along with the safety of the capital. the investor still loses out because there is a lesser amount of goods and services that can be bought with the same amount of funds. The individual has to understand that if there is merely the return of the capital then it is of no use. What this means is that if the fund returns just the Rs 10. There are significant returns that are available from several debt options like fixed deposits or even small savings investments.investment return has to at least take care of the inflation effect so that the purchasing power of the individual remains the same. Even an amount lying in the savings bank account earns 3. All these other options including bonds as well as deposits are competing for the same money of the individual. Beyond capital safety: Just ensuring the safety of the capital is not enough.5 per cent at present. Capital protection in absolute terms does not take care of the inflation effect so this need to be considered for determining returns. Several post office options are in the 8 per cent range while bank fixed deposits earn in the range of 8. .000 capital of the investor after three years saying that the capital is protected. The capital protection options from the mutual funds are actually competing against these areas and the right comparison is required for the purpose of determining the proper selection.
While there is no shying away from the fact that volatility persists in the equities market. others have relied on bank deposits to protect and grow their hard-earned money. When an individual wants to see what they can actually do on their own then they need to construct a portfolio that is of a similar nature with a similar kind of weightage so as to get the right picture. although bank fixed deposits are close to offering interest rates in double digits. While many have shifted to safe haven assets like gold and silver. This happens because there is debt as well as equity present in the investment and hence there are features of both of these when the investment is considered as a whole. there is a chink in the armour. fixed deposits now offer a much envied blend of safety and competitive returns. With interest rates showing an upward trend. But then. The global financial crisis induced a sense of risk aversion among most investors. as they have given positive inflation-adjusted returns over a longer period. Are capital protection funds better than FDs Investors have witnessed uncertainty and volatility in financial markets over the past two years.Balanced portfolio: The individual also has to ensure that they are looking at the balanced portfolio angle when they are considering the situation of a capital protection fund. Equity is considered the best asset class to go with in inflationary times. inflation! With food inflation ruling in double digits. they may still fail to beat inflation and end up generating negative returns on your deposits. the right style and approach of investing is .
Suppose an investor buys units worth Rs 10. Capital protection-oriented funds are conceived with this objective of providing capital protection and ensuring growth in a single product. which is to be invested in the equities market for potential upside participation. it will require Rs 7. the total returns on the principal investment will be approximately 13 per cent. This leaves out Rs 2. Are these funds better than bank FDs? . if the market corrects 10 per cent. This is where the need arises for a product that can offer both the safety of fixed income and capital appreciation similar to equities. On the other hand. Assuming the fund generates nine per cent yield on the fixed income portion. They invest in the highest rated debt instruments. A simple illustration can explain the concept more clearly. This performs the role of alpha generator in the portfolio. still the total return on the principal investment will be approximately 5.000.700 to earn Rs 10. The share of fixed income out of the total portfolio is decided on the basis of the prevalent interest rate. The rest is invested in equities. which mature on or before the maturity of the scheme and investments are made in such a fashion that the final maturity value of the fixed income investments is equal to or greater than the principal of the scheme. These are close-ended debt-oriented mutual fund schemes that invest in a mix of fixed income instruments and equities. as they follow a passive style of investment.crucial in order to achieve long-term gains. The tenure of such schemes ranges from two to five years. Assuming that the investment in equities appreciates at a rate of 25 per cent. These funds achieve the purpose of capital protection by way of fixed income allocation.000 in three years and thus protect the investor¶s capital.300.25 per cent.
While the fixed income portion protects the capital. In our view. 1) Capital protection ? both offer CP. 2) Expected Return : FD: you know the return and it is guaranteed for the term.5% return. Historical data (between 1991 and 2010) shows equities have delivered positive return in 80 per cent times over a three-year horizon while in a one-year time horizon. Also. an investor will pay 10 per cent tax without indexation and 20 per cent with indexation. . A longer investment horizon (say two to five years) compliments the equity returns in the portfolio. investors have received positive returns in 65 per cent of times. the equity portion gains from the India growth story. If held more than a year under the growth option. it is best to consult a tax advisor before taking a call on this aspect.Capital protection-oriented funds provide a credible portfolio solution in an inflationary environment by combining the concept of µcapital protection¶ with that of µcapital growth¶ within a single fund. the returns are taxed according to the marginal tax bracket (30 per cent in case of the highest tax bracket). Let us take it one more step and compare this against FD. What is great about CPF ? Even savings account offer capital protection with guaranteed 3. the recent correction in the equities market can be looked at as an excellent opportunity to build this kind of a portfolio. However. capital protection-oriented funds provide a tax-efficient solution. whereas in case of fixed deposits. In terms of taxation too. capital protection-oriented funds are appropriate for investors seeking to gain from equity participation without any risk of erosion in the capital invested.
Give her this solution.37. How to build your own CPF ? Say you want the funds in 6 years time. Since this is closed end fund. you will end up with 100.500 = 118. CPF carry interest risk.will grow to 100. Invest remaning Rs.0%. compounded) . Easy to liquidate CD than CPF 5) Risk: CD carry default risk. Best case: If your index is doubled in 6 years.5%.000 ( 1 lakh) Invest Rs. which has more chance to.0-1. You grandma is not convinced yet. This eats into your return.500 You get not only capital protection but you get around 3% return. default risk and credit risk. 4) Access to fund in emergency.5%-2. you will end up with . may be 1.CPF: You dont know the expected return and it is not guaranteed. Amount = Rs. FD : you dont know and you dont care. it may be slightly higher.100.000 in NSC ( yield 8%. She still insists that she needs capital protection for her portfolio.000 in 6 years time. Worst case: If the market takes a beating and if your money is halved. 3) Annual Expenses : CPF : expenses should be in the range of 1.000 in Nifty index.63.000+18.
The remaining 20% of the money in this case is invested in equity. You can even build laddered C. Rest of the money is invested in equity.P. While fixed income instruments assure your capital back.000. Depending on the time frame you are looking for you can build your own CPF portfolio. High quality fixed income instruments include instruments with high ratings that imply low possibility of default. let us take an example.100. The fund manager invests money in both equity and fixed income instruments in a pre-determined ratio.000+74. A nice 9. tax-on-capital-protection-funds A capital protection-oriented fund is a closed-ended debt scheme of a mutual fund. he would invest approximately 80% of the money into a portfolio of such instruments. offering 8% return per year. Suppose `1 lakh is invested in a capital protection fund with a three-year tenure. This will ensure that this money will grow to `1 lakh at the end of the tenure and you are assured of getting your money back. This ensures that by the end of the scheme term. . equity brings in the much needed returns.000 = 174. If the fund manager comes across instruments of high credit quality with the least possibility of default. To understand it better. portfolio for different time frame and different maturity.7% with capital protection. Most of your money is invested in high quality fixed income instruments that are expected to mature in sync with the end of the scheme tenure. the money invested in these instruments grows to the original sum invested in the capital protection-oriented fund.
However. In extreme the issuers of the high quality fixed income instruments default. they are rarely traded on the stock exchanges offering little liquidity to the investor. Who can invest in Capital Protection Funds: An investor looking at capital preservation as an investment objective An investor looking at investing for at least 3 years An investor looking at tax efficient returns (substitute for PPF or FDs) Limitations of Capital Protection Funds: S. Units of the capital protection oriented scheme are listed on the stock exchanges. he is likely to get the capital back along with returns generated by equity. A point to note is that the fund does not guarantee your capital. a scheme may show capital loss. Limitation Description 1.Put simply. No Guarantee SEBI does not permit funds to provide any guarantee for capital protection The asset management company is not liable to pay back in case of capital erosion. if the investor remains invested till maturity of the scheme. Normally. 2. the investment is not liquid The amount can be redeemed only at the end of the tenure of the fund . Low Liquidity Being closed ended in nature. the performance of the capital protection-oriented funds will depend on the fund manager's ability to choose the right calls in equity.No.
66% Tax with indexation whichever is lesser Dividend Distribution Tax * The rates indicated above are inclusive of surcharge and 14.33% without Individuals Corporates As per income tax slabs As per income tax slabs Capital Gain indexation or 22.66% indexation or 22. Taxation The taxation of capital protectio n funds is same as that of debt funds Taxation Short Term Capital Gain Tax Long Term 11.3.33% without 11. Returns The returns of capital protection funds are not in line with the returns of equity funds.16% with indexation whichever is lesser 22. but rather more in line with the debt funds due to the higher debt allocation 4.66% .
cess applicable 5. Entry Load There is no entry load in capital protection oriented fund etc .