<div><em>At a time when markets are volatile, Kotak mutual fund launches capital protection oriented scheme. A rush of such funds may be expected from other mutual funds soon. <strong>Sunil Dhawan </strong>reports</em></div><div> </div><div>Kotak Mutual Fund has recently launched Kotak Capital Protection Oriented Scheme Series 1 (KCPOSS-1). In addition there are other such Capital Protection Oriented Scheme from fund houses of Reliance, ICICI, UTI amongst others. </div><div> </div><div>In these times, when the stock market volatility is on high, many investors get a bit conservative. The fear and the probability of losing capital in the shot-term is high. Lakshmi Iyer, Chief Investment Officer (Debt) and Head of Products, Kotak Mutual Fund informs, “In fact volatile markets like the one we are currently witnessing tend to dissuade some section of investors, especially the conservative ones. Though the long term bullishness may remain intact for them. It is therefore an opportune time for launch of such strategies which allow for equity participation, at the same time is oriented towards capital protections”. For investors who want to expose funds into equities yet keep the capital safe may consider ‘capital protection oriented’ (CPoF) mutual funds scheme. </div><div> </div><div>What are CPoF: CPoF are close-ended schemes and fund houses keep launching them off and on. They are hybrid schemes and therefore relying on both debt, equity asset classes to generate returns. What is important is the maturity period of such schemes. </div><div> </div><div>Being non-equity funds, they are tax efficient if held for at least 36 months i.e. 1095 days. The long term capital gains tax in them is 20 per cent after indexation if held for 36 months. This makes them tax-efficient than bank fixed deposit which are fully taxed at individuals’ income slab. </div><div> </div><div>Why Now: Considering the interest rate cycle in the country today, one may expect rates to fall further. When rates fall, prices of debt asset move up thus generating high returns. With the Indian economy to grow and equities to deliver from here over a three-year horizon, someone with these views should consider CPoF. Nilesh Shah, Managing Director, Kotak Mutual Fund at the time of scheme launch had said, “To hedge against market volatility, this scheme will pick growth oriented stocks available at reasonable valuations, which are now available in plenty after market correction while putting the greater share in higher rated debt instruments.” </div><div> </div><div>It’s important to note that these schemes do not guarantee the returns and neither is the capital assured on maturity. They therefore use the word ‘oriented’ to maintain that the scheme can only endeavour to keep the capital safe. This they achieve by investing a larger portion of investor’s money in debt assets and a small portion into equities. Lakshmi says, “If you see the last 2-3 year equity returns, they still continue to be fairly robust.” As per valueresearchonline.com data, the 3-year return of some existing CPoF are in the range of 8-13 per cent per annum.</div><div> </div><div>End note: CPoF are more suited for investors who doesn’t want to lose capital yet generate returns higher than other debt products such as bank fixed deposit would generate over 3-year period. Also, these being closed-end and with less liquidity options in secondary market for them, lock-in only those funds which might not be required for at least 3 year period. As an investor, the decision to invest hinges on both equity and debt markets being able to perform over next 36 months. Our take is to go ahead considering both assets being in a sweet spot especially debt.</div><div> </div><div> </div><div> </div>
