The meaning and significance of the term investment has changed with time. These days people are investing to improve their lifestyles, apart from ensuring that they are able to lead a comfortable life, post-retirement. This generation is not happy with bank deposit plus returns, they want more.
When I was new in this business, assured return schemes were the order of the day – Post Office schemes, KVP, NSC and NSS. Times have changed. The risk has now been transferred from the issuer to the investor. In this age of variable returns, investors have to be more aware of their options. A laidback investor who seeks safety in bank deposits may barely beat inflation and face stagnation in growth of his wealth.
Proactive regulations
And if you venture out, you have to be more informed and alert. We have come a long way and smart proactive regulations have played an important role in making investors aware.
Capital Protection Oriented Funds (CPoFs) are investment options which do not require day-to-day monitoring by investors, considering their busy schedules, and which would give them potential returns, which can be higher than bank deposits on tax adjusted basis. These investment instruments are a mix of both, equity and debt, and their primary objective is to protect the capital at the maturity of the scheme and offer some upside through equity investments. Thus, one of the best features of these close-ended schemes is that they enable risk-averse investors to gain exposure to equities.
A significant amount of money (about 70-80 per cent) of these funds is invested in top-rated fixed income instruments and the remaining in equities. These options also aim to protect capital on the downside (if 15-20 per cent exposure in equity market does not deliver expected returns over the three-to-five-year tenure of the scheme). Currently, when equity markets are highly volatile, CPoFs are the best investment instruments where the fixed income portfolio ensures that investors get their money back at maturity and the equity allocation keeps the excitement alive.
We now have a three-to-four-year track record of CPoF's, where we have not had the best of runs for equity markets. Despite this, most of these schemes have delivered returns ranging from 6-12 per cent, depending on when the investor came and what were the interest rates at the launch of the scheme. With superior capital gains tax treatment, the post-tax returns compare very well with debt investments, such as bank FDs, company FDs and bonds, which are subject to marginal rate of tax according to your income slab.
acid test
Any scheme, such as CPoF, goes through the acid test to diligence by the securities market regulator, SEBI, and all due disclosures are made. An informed and certified distributor also has a very important role to play.
All said and done, the new generation of investors are willing to stick their necks out and make an informed choice. CPoF is an investment option which tries to meet their need of aspirational returns without putting their capital at undue risk. However, investors should take note that these funds can provide capital protection, only if they are willing to remain invested till the maturity of the schemes.
A final word — all investments are subject to market risks; so, do read all documents carefully before signing anywhere.
(The writer is Vice-Chairman and MD, Bajaj Capital)