Capital Protection Funds

What is a Capital Protection Fund?

Capital Protection Funds are closed-end mutual funds that invests in both debt and equities. Over the course of the scheme, the portion of debt would be equal to the principal amount in order to “protect” the capital. The investor’s capital is guaranteed along with capital gains that the investment in stocks will accumulate.

What are the benefits of availing a Capital Protection Fund?

The principal amount that is invested will be safeguarded. A major part of the amount will be invested in fixed-income instruments like Certificate of Deposits, T-Bill, Bonds, etc. and the rest in equities. There is limited risk involved, due to the same.

The debt-equity allocation will be based on the tenure of the scheme and the yield from the assets. These type of funds provide assured payment upon maturity.

Features of Capital Protection Fund

  • Lower risk but volatility is returns is prevalent. There are no guaranteed returns as compared to bank fixed deposits, government bonds or post office savings.
  • There is active participation in fund management.
  • Tenure extends over a period of 1, 3 and 5 years.
  • Tax benefits for indexation is available. Indexation means adjusting the purchase price during inflation. Long term capital protection funds are taxed at 20% with indexation and 10% without indexation. Short-term capital gains will be taxed according to the income tax slab of the individual.

Who is it ideal for?

The Capital Protection Fund is ideal for those who are looking for good returns with the lowest possible risk element. The investors will participate in the equity market but are assured of their capital invested. Therefore, this scheme is ideal for those who wish to make a long-term investment. Capital Protection-Oriented Schemes are also an ideal option when the market is volatile, i.e., when it faces medium to low levels of inflation.

Comparison between Capital Protection Funds and Fixed Maturity Plans?

Type Capital Protection Fund Fixed Maturity Plans
Investment Investment is made in both debt and equity. Investment is made only in debt.
Maturity These funds are closed-ended and the maturity is pre-determined. This is also closed ended, with a pre-defined maturity.
Exit The investor can exit upon maturity of the funds or if they want to exit earlier, they can do so via the stock exchange. The investor can exit upon maturity of the funds or if they want to exit earlier, they can do so via the stock exchange.

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