Mutual Funds
Capital protection funds cannot guarantee safety of capital

These funds invest a minimum in equities, but even this is enough to drag down the fund in a downslide

Canara Robeco Mutual Fund has filed an offer document with the Securities and Exchange Board of India (SEBI) to launch a closed-ended Capital Protection Oriented Fund. It will be called Canara Suraksha Fund-Series 1. Capital protection funds are structured products, designed to attract risk-averse investors to the stock market.

The scheme endeavours to protect capital by investing in high-quality fixed income securities maturing in line with the scheme's tenure as the primary objective, and to generate capital appreciation by investing in equity and equity-related instruments as a secondary objective.

The scheme offers both growth and dividend (payout) options for investment. Its two-year plan invests 85%-100% in debt securities and money market instruments where there is low to medium risk. The three-year plan will do the same, except that asset allocation will be 75% -100%, and the one-and-a-half-year plan investment will invest 80%-100% in these instruments. The two-year plan will invest up to 15% in equities, the three-year plan up to 25% and the one-and-a-half year plan will invest up to 20% in equities.

Capital protection funds invest most of their capital in assets with a low risk, for example in government securities. At the end of maturity, this part of the capital with its returns will be worth as much as the capital of the fund at inception. So the invested money can be repaid to investors at the end of the investment term. The remaining smaller part of the capital is to be invested in more risky assets. The possible yield on this part could produce the extra return over the capital protection at the end of the duration. The funds do not invest directly in bonds or equities, but in complex structured assets, usually options.

But how useful are these funds? Capital protection funds are advantageous for investors who do not want to expose themselves too much to equity risks, and they are willing to sacrifice some part of the returns to invest in safer instruments. With capital protection funds, you may also be exposed to exotic investments. For example: Far-Eastern or commodity market investments, which are undesirable and unsafe.

Apart from this, the high fee structure is a deterrent. The typical fee structure is 2.25% of assets under management. These funds invest mostly in risk-free instruments, which can be done by an individual without the expertise of a fund manager. The returns are also slightly higher than fixed deposits. They simply offer investors moderate safety and moderate returns. That is why they are benchmarked against the Crisil MIP Blended Index. There is little scope for fund managers' expertise and the high fees are not justified.

Most importantly, you cannot be sure that your capital will be protected, given the way the asset allocation will happen. If interest rates shoot up and equities fall sharply you could lose the capital. During the collapse of 2008, for instance, these funds should have protected investors from the downslide. However, this was not so. They underperformed miserably against their benchmarks in that year, yielding pathetic returns of -8% on an average. So, it can be seen that even with a minimal exposure to equities, such investments drag down the returns for the whole fund.


Govt decision on Cairn-Vedanta deal likely in few weeks

Mumbai: The government is likely to take a decision on the $9.6-billion Cairn-Vedanta deal in the next few weeks and that the decision would be taken on merits, reports PTI quoting a top government official.

"There is absolutely no delay on the part of the government regarding the Cairn-Vedanta deal. We will come to a decision on this (deal) in the course of the next few weeks.

The decision will be taken on merits," oil secretary, S Sundareshan, told reporters here today.

The Anil Agarwal-promoted London-based Vedanta is acquiring a majority stake in Cairn India from Edinburgh-based Cairn Energy for a consideration of up to $9.6-billion.

Cairn India is a three-way joint venture with Cairn, domestic oil and gas major ONGC and Petronas of Malaysia.

Presently, the Edinburgh-based Cairn Energy holds a 62.37% stake in its Indian arm.

"We have told them (Cairn Energy) that we will require 8-10 weeks to examine all the issues and only then we will take the final decision," he said.

On the controversy over the payment for oil imports from Iran, Mr Sundareshan said, "The flow of oil will not stop and National Iranian Oil Company (NIOC) will continue to supply oil to the Indian oil companies and we are hopeful of a settlement very soon."

He said that a high-level delegation comprising of officials from the Reserve Bank of India, State Bank of India, the ministry of finance, ministry of petroleum and natural gas, Mangalore Refinery and Petrochemicals (MRPL) and Indian Oil Corporation had gone to Iran to discuss the issue.

"Until a final settlement is worked out, oil supplies will continue and we are hopeful of a settlement very soon," he said.

Following the increase in the prices of crude oil to $92-$93 per barrel, he said that the under-recoveries were likely to reach Rs72,000 crore by the end of this fiscal.

On divestment in ONGC and Indian Oil Corporation, Mr Sundareshan said, "The ONGC FPO (follow-on public issue) will hit the market by end-this fiscal. We plan to raise around Rs13,000-Rs14,000-crore through the divestment. However, due to fluctuations in crude oil prices, the Indian Oil FPO will take place only in the next fiscal," he said.


SBI Funds Management appoints Deepak Chatterjee as MD

Apart from bringing in expertise of a generalist banker to SBI Mutual Fund, Deepak Chatterjee also brings with him a wide knowledge-base and understanding of capital markets

Deepak Chatterjee has been appointed as the new managing director of SBI Funds Management Pvt Ltd, investment manager for SBI Mutual Fund.

Mr Chatterjee has over 32 years of rich experience in the banking sector. In his previous assignments in the last 10 years, he has held senior positions such as EVP & head, regional office, New Delhi at SBI Capital Markets Ltd, SVP & Group head of project finance group, Mumbai at SBI Capital Markets Ltd and AGM & head of commercial branch, Nehru Place, New Delhi at SBI.

Apart from bringing in expertise of a generalist banker to SBI Mutual Fund, Mr Chatterjee also brings with him effective team management skills and a wide knowledge-base and understanding of capital markets.

His previous assignment was of his most successful stints was in the capacity of general manager (Financial Institutions Group) international business group in SBI. As a general manager he was handling fund raising for SBI outside India, country risk and bank exposures. Mr Chatterjee has immense knowledge and experience in various areas of banking such as, credit administration, investment banking, international banking operations, branch management, etc.


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