A closed-ended debt scheme that aims to safeguard the principal amount while offering a potential equity-linked capital appreciation.
Traditionally, stock markets are considered as a volatile and risky investment avenue. That is why risk averse investors prefer to park their money in seemingly safer avenues.
If safeguarding your principal amount is your objective, terms like “Capital Protection” will definitely appeal to you. However, before you invest in such a scheme, here are a few important things you need to know about Capital Protection-Oriented Schemes (CPOS) and what you should expect from them.
1. What are Capital Protection-Oriented Schemes?
As the name suggests, capital protection-oriented schemes are instruments that aim to protect at least the initial investment, along with an opportunity to make additional gains, as per the investment objectives of the fund. However, it is important to note that there are no guaranteed returns or guaranteed capital protection.
2. Where do these funds invest?
CPOS are closed-ended debt funds that typically invest a major portion (say 80%) of your money into highly secure debt instruments like AAA-rated bonds, and the remaining amount is routed towards riskier avenues like equity.
It is this very structure that is oriented towards protecting the principal. By the end of the stipulated term, the debt portion of the fund grows to give you back the principal while the equity portion brings the potential upside. Even if the equity market crashes, the principal amount is protected. Hence, CPOS gives you the best of both worlds.
3. Who should invest in these funds? What is the objective of such a fund?
The objective of CPOS is to safeguard your principal amount while creating an opportunity to earn superior returns by investing in equity based investments.
Such schemes are ideal for investors who want to protect their capital against the downside risk and also participate in the equity market.
However, since capital protection-oriented schemes are closed-ended schemes with maturity period of one, three and five years, investors must invest with a long-term perspective. Such funds are ideal during volatile markets having medium to low levels of inflation.
4. How are Capital Protection-Oriented Schemes different from Fixed Deposits or Fixed Maturity Plans?
For investors looking for safety of their capital, bank fixed deposits and post office saving schemes have been the de facto choice. Then why should one look at CPOS or even FMPs, both of which are also debt-based schemes? Here are the key differentiating factors:
| CPOS | FMP | Bank Fixed Deposits | |
| Invests In | Majorly Secured Debt + Some Equity | Secured Debt (Bonds, T-bills, etc.) | Debt |
| Objective | To safeguard principal amount and offer a potential equity-linked upside | To safeguard principal amount and gain from high yields | To safeguard principal amount |
| Volatility in Returns | Yes | No | No |
| Fund Management | Active | Passive | Passive |
| Tenure | One, three and five years | 30, 180, 370 and 395 days | Few days to 60 months and more |
| Tax Treatment | Indexation benefits available | Indexation benefits available (when held for more than 3 years) | As per the person’s income-tax slab |
| Principal Guarantee | No | No | Yes (however, FDs are insured only up to Rs 1 lakh under the Deposit Insurance & Credit Guarantee Scheme of India) |