Market is flooded with Capital Protection Oriented (CPO) funds. Every fund house is coming with such close-ended schemes at regular interval. New Fund Offers (NFO) is often backed by either analyzing the best opportunities prevalent in the current market or by finding out the pattern in investors’ behaviour – their fear and hope (read herd mentality). Unfortunately this second trait is getting more importance behind coming out with one after another – hard to distinguish – CPO funds.
To sum up the objective of a CPO fund in one sentence is – Aiming (not guaranteeing) to protect your capital and generating some profit. How difficult or easy is that?
Let us pick up a real case to study this.
Sandip is looking forward to invest Rs. 5 lakhs. His tenure of investment is 3 years (typical in case of most CPO funds also). Sandip wants to protect his capital throughout this tenure. To beat inflation he also wants to earn enough profits from his investment. To achieve this twin objective Sandip has two options to choose from – invest in a CPO fund, which is currently open or create one by himself. He decides to go with the second option i.e. by creating a CPO fund.
To be able to do that he has to first protect his total investment of Rs. 5 lakhs. This way, he will invest a certain amount for 3 years, and gets back Rs. 5 lakhs as maturity amount. Let us assume a 3 year FD is giving an interest rate of 9.5% p.a. Mutual fund investment (in a scheme which has best track record over last 5 years) is going to give him a return, say, 12% p.a.
So following scenarios may come out of his investment:
| FD interest |
9.50% |
9.50% |
9.50% |
9.50% |
| Tax slab |
0% |
10% |
20% |
30% |
| FD interest (post tax) |
9.50% |
8.55% |
7.60% |
6.65% |
| FD investment amount required to protect capital |
380,827 |
390,913 |
401,359 |
412,180 |
| MF investment amount (Lump Sum) |
119,173 |
109,087 |
98,641 |
87,820 |
| MF investment amount (SIP) |
4,966 |
4,545 |
4,110 |
3,659 |
| MF investment value after 3 years (Lump Sum) |
167,430 |
153,259 |
138,583 |
123,380 |
| MF investment value after 3 years (SIP) |
216,039 |
197,754 |
178,818 |
159,201 |
| Overall Portfolio Return (p.a.) – Lump Sum |
11.16% |
10.22% |
9.24% |
8.23% |
| Overall Portfolio Return (p.a.) – SIP |
14.40% |
13.18% |
11.92% |
10.61% |
So this asset allocation strategy works better if Sandip is in lower tax slab or a senior citizen. The returns can be on the higher side if horizon is longer.
But creating a CPO fund on your own will surely have some advantages. First, while choosing your fixed income instrument you can choose a bank FD or AAA rated corporate FD/NCD. This way you can go a long way in actually guarantee ‘capital-protection’. In most likely case, you are going to hold the instrument throughout the tenure, thus avoiding interest rate risk and re-investment risk. Second, you can choose the best performing equity fund manager in the market to manage your equity portfolio. Third, you have full control over your portfolio. This facilitates flexibility and liquidity all the time.
What do you think? Is this a good idea to create a CPO fund like above? Please post your comment and let us know.