Capital protection funds catch up, HDFC & Kotak at Sebi door

MUMBAI: Kotak Asset Management Company and HDFC Mutual Fund are learnt to have filed the offer documents with Securities and Exchange Board of India (Sebi) for launching capital protection funds.

UTI Mutual fund is in the process of finalising the details and is expected to file offer documents soon. Franklin Templeton was the first mutual fund to file for such fund last month. Capital protection funds promise investors that there will be no erosion of the capital invested by them. Recent Sebi regulations said the protection should be built into the ‘structure of the fund’ and has prohibited third-party guarantors for such schemes.

Sandesh Kirkire, CEO, Kotak Mutual Fund, confirmed the devopment. “Yes we have filed papers with Sebi for such a fund.” A K Sridhar, CIO, UTI MF, said, “We are in the process of finalising the details of our capital protection scheme. We have not filed the offer document as yet.” HDFC officials were not available for comments.

Recently, Reliance Mutual Fund too had announced a closed ended capital protected fund. The proposed Capital Shield Fund, to be positioned as a ‘capital protection oriented scheme’, will offer two plans, for three and five years, respectively. Franklin Templeton’s scheme also had similar options, namely 3-year and 5-year options. The other forthcoming capital protection schemes — including UTI, Kotak and HDFC — are likely to be of similar duration, sources said.

Capital protection schemes promise that at least the minimum amount, which has been invested, will be returned to the investor irrespective of the movements in the market over the stipulated period. Besides, the investor can get a healthy appreciation in case NAVs of the funds rise by that time.

It is widely known that such mutual funds are to invest the bulk of their assets in bonds and debt instruments and the rest into equities, hoping for some capital appreciation. The Sebi order had also said that the mutual fund portfolio, under the scheme, must be rated by a Sebi registered credit rating agency.

Capital protection funds are very popular in West. However, when Sebi first came out with the guidelines for such schemes, there was widespread skepticism. After all, most investors who wanted a protection on their invested capital would be better off investing in bank fixed deposits. However, quite a mutual funds have since filed applications with Sebi for launching their capital protection schemes.How the Indian investor respond to such schemes is yet to be seen.