No mutual fund (MF) scheme, not even capital protection-oriented scheme, can assure you returns, even though its name suggests so.
What does it do?
A capital protection-oriented scheme is typically a hybrid scheme that invests significantly in fixed-income securities and a part of its corpus in equities. These are closed-end schemes that come in tenors of three and five years. To put its modus operandi simply, if the fund collects Rs 100, it invests Rs 70 in fixed-income securities and Rs 30 in equities. The money gets invested in such a way that the Rs 70 portion grows to become Rs 100 in three years, assuming that is the fund’s tenor. That way you get your entire capital back after three years. The equity portion of Rs 30 gives the return kicker.
Read the offer document carefully
All capital protection-oriented scheme have a clause in their offer document. For instance, Sundaram Capital Protection Oriented Fund five years’ (Series 3) offer document, whose new fund offer period closes on 31 October, has a separate clause in its “scheme information document” (or offer document) under the heading “no guarantee”. The offer document says: “The scheme is ‘oriented towards protection of capital’ and not ‘with guaranteed returns’. It shall be noted that the orientation towards protection of capital originates from the portfolio structure of the scheme and not from any bank guarantee or insurance cover. Investors are neither being offered any guaranteed/indicated returns nor any guarantee on repayment of capital by the scheme.There is also no guarantee of capital or return either by the mutual fund or by the sponsor or by the asset management company.”
It’s “orientation”, not a “guarantee”
According to the rules laid down by the capital market regulator, Securities and Exchange Board of India (Sebi), MFs cannot assure any returns. This is because MFs invest in stock and bond markets and, therefore, their fate is linked to market returns. So when Sebi allowed fund houses to launch capital protection-oriented scheme, it mandated fund houses to include words “capital protection orientation” in its name to make its intention clear to potential investors. Fund houses can’t use the words “guarantee” in their names.
What’s the difference?
Though they can’t guarantee returns, capital protection-oriented schemes are structured in such a way that investors get their principal back (and some excess returns), unless things go horribly wrong. Their closed-end structure ensures that premature withdrawals are not allowed; a necessity to ensure that you get all your money back at the end. Also, these funds have to be rated by a rating agency. Remember the credit rating is not to indicate the returns guarantee, but it is a comment on the fund’s portfolio structure and whether that will help the fund to achieve its objective.