The securities exchange board of India (SEBI) has stated that no mutual funds scheme can guarantee you any returns or even provide you capital protection for that matter. If you have invested in a Mutual Fund which bears the term capital protection scheme, then you should know that it is not in the literal sense.
What is this capital protection oriented scheme?
This type of scheme is a closed ended scheme whose tenor ranges from 3-5 years. It is a hybrid scheme that looks towards investing a part of your funds in fixed income securities and the rest in equities. For example, if you invest Rs100 in a capital protection oriented scheme, the fund invests Rs 70 in fixed income securities and Rs30 in equities. Investing in Fixed income securities helps this Rs 70 to grow to Rs100 in the next 3 years, if that is the fund’s tenor. This is the how the capital protection is carried out. Rs30 that is invested in equities gives you an additional return if the particular equity in which your fund is invested in performs in those said 3 years.
Importance of the Offer document
As a prudent investor, it is mandatory for you to read the offer document carefully before you take your initial step of investing. Reading the offer document enables you to understand what the scheme actually guarantees and for what it cannot be held liable for. If you just get into the words of your fund manager, and not know the underlying functioning of your fund, there are chances that you might forced into debt to borrow loans like car loan, personal loan etc to finance your financial requirements in the eventuality of a loss, just because you didn’t heed to the necessity of reading the document.
In case of a capital protection oriented scheme, most offer documents state that the scheme is ‘oriented towards protection of capital’ and not ‘with guaranteed returns’. Another thing that should be noted is that the move towards capital protection does not come from any kind of bank guarantees or insurance covers but from portfolio structure that the scheme is built on. This means that investors cannot be assured of any kind of guarantees for capital or any kind of returns nor do they offer any repayment of capital or returns generated by the scheme either by the mutual fund or any Asset management Company (AMC) or by any sponsor.
MFs do not guarantee any returns
As specified in the regulations laid down by SEBI, Mutual Funds do not guarantee or assure any returns. This is mainly because the funds that you invest are directed to investments in stock and bond markets. As such, the future of your returns depends entirely on the market returns. So, when SEBI had enabled Mutual Fund houses to launch this capital protection orientation scheme, SEBI instructed to include words “capital protection orientation” which means that this fund does not guarantee any returns or protection but it is an orientation for the achieving the same. This should make its intention much clearer to potential investors who wish to invest in such schemes. Therefore, fund houses have been strictly instructed to not use the word “GUARANTEE” in the names of such schemes or any type of schemes.
How can you benefit?
Although these schemes do not guarantee returns, you as an investor will be hugely benefited with the advantage of getting their principle back at the end of the investment tenor. But the main problem is that since they are close ended schemes, premature withdrawals are not possible thereby making an investor handicapped in case of the investor wants to pull back his investment if the funds in which one’s savings are invested, underperforms.