Did You Know | Capital protection-oriented schemes do not guarantee your capital

Did You Know | Capital protection-oriented schemes do not guarantee your capital

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?

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.