How do capital protection-oriented funds work?

Capital protection-oriented funds are designed to protect your capital while offering limited growth. They mainly invest in fixed income (safe instruments) and a small portion in equity. The debt portion ensures your money stays safe, and the equity portion adds growth potential.

What are capital protection-oriented funds?

Capital protection-oriented funds are close-ended mutual fund schemes. They aim to protect your principal by investing a major part (usually 80-90%) in high-quality debt instruments, while the rest is allocated to equities. The idea is to use the debt returns to safeguard your capital, while equity offers growth potential.

These funds are ideal for investors who want to take minimal risk but still want better returns than traditional options like fixed deposits.

How do they work?

These funds lock your money for a specific period (usually 3-5 years). During this time, they follow a structured investment strategy:

• Debt portion: Invested in fixed income securities that mature at the end of the term. This helps recover your original investment amount.
• Equity portion: Invested in stocks to generate returns over and above your capital. If markets do well, you benefit from additional gains.

This combination of debt and equity creates a balance between safety and potential growth.

Are returns guaranteed?

No, capital protection-oriented funds do not guarantee returns. While they are structured to protect your principal, actual performance depends on how well the debt and equity portions perform. SEBI regulations also require that the fund’s name clearly states that capital protection is “oriented” and not assured.

This means while the fund manager aims to protect capital, there’s still a small risk depending on market conditions.

Who should consider these funds?

These funds are best for:

• Investors with low to moderate risk appetite
• People nearing retirement or wanting capital protection
• Those looking for better returns than FDs but without high risk

If you prefer safety with limited exposure to equity, this type of fund can be a suitable choice.

Capital protection-oriented funds offer a smart balance between safety and mild growth. Though not entirely risk-free, their structured approach helps in preserving capital while giving equity exposure. Always read the scheme documents carefully and check credit ratings before investing.