Wary of risks? Opt for capital protection funds to earn higher returns

Should you try to preserve your capital or should you resort to value investing to make money in the long term? Even as the market is hovering around all-time high, many investors are pondering over the question these days as they see conflicting signals emerging from the mutual fund houses. For example, ICICI Prudential AMC and LIC Nomura AMC have recently opened their new fund offers (NFOs) of capital protection oriented funds (CPOF) for subscription.

Axis and Pramerica MFs are coming out with schemes that would invest in shares of small and mid-sized companies. NFO of ICICI Prudential Value Fund closed recently after collecting Rs 645 crore.

As you can see, one set of offerings looks to preserve capital in anticipation of a market fall, whereas the other theme is trying to explore value investing. “Markets may remain volatile in the short term. But it is time to allocate some money to equities with 3-5-year time-frame, given the attractive valuations of the broader market,” says Ankit Swaika, head of investment advisory and research, Religare Private Wealth Management.

A Case for Capital Protection Funds

That settles the matter in favour of value investors. However, conservative investors who don’t want to take any extra risk can still explore capital protection-oriented products. These schemes are primarily meant for conservative investors with 3-5 years’ investment timeframe. “Investors like investment avenues that provide higher returns than traditional fixed income products without taking any additional undue risk with their principal,” explains Nimesh Shah, MD & CEO, ICICI Prudential AMC.


CPOF offers investors the benefit of upside in equities in limited manner without any risk on capital, he adds. If you find that argument convincing, you can check the universe of CPOFs. They are essentially closed-ended schemes that invest in a mix of equity and debt. They come with two-, three- and five-year tenures.

In a five-year fund, around 75 per cent of money is invested in good quality bonds that would ensure return of capital at the end of five years. The remaining 25 per cent is invested in equities to boost returns. “While we expect markets to remain volatile till the polls, equities definitely look a better asset class compared to real estate and gold. Valuation of equities is attractive, especially in the midcap space,” says Shah. “Generally, we have seen equities provide healthy returns when bought during periods of low GDP growth and we feel we are close to the bottom in that respect,” he adds.