Protect your principal investment by choosing capital protection debt funds

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Mutual fund, as we all know, is quite a safer investment option compared to stock market. The reason being the efficient fund managers who constantly disperse the investments across different securities such as stocks, bonds, money market instruments, etc. With such diversification, mutual funds reduce the risk element significantly as a fall in any security can get compensated with a rise in another. There is one scheme called Capital Protection-Oriented Schemes (CPOS) that aim to safeguard the investment. Let’s get down to know CPOS in detail.

Overview & benefits of CPOS

Capital protection-oriented scheme, a type of mutual fund scheme, which looks to protect at least the initial capital as well as give you the opportunity to make extra gains. These schemes are closed-ended funds that normally invest a majority of your money in highly secured debt instruments such as AAA-rated bonds and the remaining amount goes into the volatile segment, equity, which offers potential for higher returns. The scheme is oriented mainly toward the protection of the principal amount. At the end of the stipulated maturity period, the debt portion of the scheme grows to provide you the principal amount and the potential returns are offered by the equity portion. The principal amount here gets protected despite the fall in equity market. There is no guarantee that the capital will be protected but probabilities of capital safety is higher in this option.

Who should invest in CPOS?

  • CPOS is perfectly suited for investors looking to protect their invested capital against the downside risk while participating in the equity market to enjoy higher returns at the same time.
  • As capital protection-oriented schemes are close-ended funds with a fixed maturity period of 1-5 years, it is imperative you invest in the same with a long-term investment horizon. These funds are a good option during volatile markets with medium to low levels of inflation.
  • These funds are designed for investors with a defined financial goal.
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Disadvantages

  • Capital protection funds are listed on the stock exchange as they are close-ended schemes. As a result, there are less chances that you can exit at fair value as liquidity on products listed on the exchanges has proved to be quite poor.
  • Long-term capital gain on these funds are taxed at 10.3% and 20.6% without indexation and indexation, respectively. Indexation is a tool that adjusts the purchase price for inflation while calculating long-term capital gain tax.