Capital protection funds are closed-ended mutual fund schemes that are open for subscription only during the new fund offer (NFO) and thereafter no redemption or fresh subscription is allowed in the fund. So the corpus or invested amount remains constant throughout the investment horizon. Such funds are typically targeted at risk averse investors who seek capital appreciation but with no loss of capital. So, such funds as the name implies work in a way to protect an investor's hard earned capital money.
Capital Protection Funds are well-suited for:
In case if you as an investor class have the below specified consideration with respect to your investment then in that case you can definitely bet on money in such funds.
Investment horizon of 3-5 years with some definite financial goals as capital protection funds are close-ended schemes. Further, despite the listing of capital protection funds on the exchanges, such funds offer low or poor liquidity.
Investors seeking capital protection together with capital appreciation
Investors on the look out for a better deal in terms of rate of return in comparison to bank FDs, PPFs, NSCs and debt funds.
However, if you are seeking higher returns of of 30-40% your investment objective would not be met by investment into capital appreciation funds.
How does capital protection funds protect an investors capital?
Though there is no certainty or assurance with regard to capital protection, such funds usually and in most cases become successful in protecting the invested capital. Such funds invest 70%-80% of the total corpus in debt securities and the remaining 20-30% in equities. During the investment horizon of 3-5 years, the capital invested in debt earns some interest income and appreciation. So, even in the case when total income invested in equity is under loss, the returns generated by debt securities would offset loss on account of equity investment and the prime objective of capital protection would be attained.