How do capital protection funds structure their returns?

Capital protection funds aim to safeguard your invested capital while giving moderate returns. These funds invest a large portion in debt (safe instruments) and a smaller part in equity (for growth). This way, your capital remains secure, and you also get a chance to earn returns from the equity portion over time.

What are capital protection funds?

Capital protection funds are mutual fund schemes designed to protect your original investment. They mainly invest in fixed-income securities like bonds or debentures that mature at the end of the fund's term, ensuring your initial capital is preserved. A smaller part is invested in equity to help you earn extra returns.

These funds usually have a lock-in period and are best suited for conservative investors who want low risk but still want some growth opportunity.

How are returns structured in capital protection funds?

Returns in capital protection funds come mainly from:

• Debt allocation: Around 80-90% of the investment is in debt instruments. These are selected in a way that they mature with the invested amount matching your capital at the end of the tenure.
• Equity allocation: The remaining 10-20% is invested in equity markets. This portion adds growth potential without risking your capital.

So, even if the equity portion doesn’t perform well, your capital is still protected by the debt part.

Are capital protection funds really safe?

These funds aim to protect your capital but don’t give any guarantee like fixed deposits. The safety depends on the fund manager’s choice of debt instruments. If the chosen bonds default or face downgrades, there can be a small risk.

However, capital protection funds are usually managed conservatively, and top-rated debt papers are chosen to maintain safety.

Who should invest in capital protection funds?

These funds are ideal for:

• Investors with low risk appetite
• People close to retirement
• Those who want better returns than fixed deposits, but without high risk

If you want peace of mind that your capital won’t be lost and still want some equity exposure, this is a good option.

Capital protection funds are a balanced investment option for people who want safety and moderate growth. They offer more flexibility than fixed deposits and help you stay invested in markets with lower risk. Always check the fund's rating and portfolio before investing.