MFs worry over capital protection plans

This is a recent scheme allowed by SEBI to be launched by the Mutual Funds. This fund predominantly invests in high quality debt. It also invests in equities in-order to increase the return for the investor. With investment in high quality debt the return of this fund is expected to be around 7 to 8 percent. So this fund is protecting investors fund from the inflation. The return is not high.

Another issue with this fund is that it is a close ended fund. So there is lock in period for the investor for 3 years to 5 years. The return given is equal to fix deposits provided by banks. So we can say the investor is getting the same return. But the banks are now providing innovative products like fix deposit of around 1 year with interest rate of around 8 percent. So the time horizon can attract customers to invest in banks fix deposit rather than the Capital Protection Plans. Mutual funds sell their products through various channels. Bank is one of them and banks contribute the highest in terms of amount of investment. So the success of this product lies with the co-operation from the banks.

Banks are promoting their FDs in-order to increase the deposit. Because the growth of credit (30%) is more than the growth of deposits (22%). So it is unlikely that the bank will suggest capital protection fund instead of their FDs. Banks are promoting these FDs vary aggressively through advertisement in print media and television. In India investors the investment in stock is just 4 percent of savings. Whereas it is above 40 percent in banks. Generally many are ignorant about mutual fund and the market crash of May has made a bad impact on the investors. Investors have more trust on banks and also public sector banks rather then any other financial institutions.

In present scenario it seems that this product is not going to succeed.

Sources: Economic Times