Capital protection oriented (CPO) schemes and dual advantage funds, in recent times, have done quite well in offering investors a fairly high return with relatively low risk.
In some CPO funds, 80% of the corpus is invested in debt instruments with a defined maturity date. The remaining 20% is invested in equity. The debt component is structured in such a way that on maturity, the returns from debt will ensure that the capital is protected. The equity component gives an upside to the overall portfolio. This is a safer variant of the CPO, where if you invest Rs 100, you have the potential to get between Rs 110 and Rs 130 at maturity.
Another variety is the leveraged funds where the 20% equity component is invested in NSE nifty options, the tenure of which matches that of the fund's. So it is possible to get a 100% participation in the equity market without reducing the debt exposure. This works better in investor's favour if the stock market is on the upswing during the fund's tenure. In this case, Rs 100 invested can yield you Rs 200 in return or even more. On the other hand, if the equity market was flat or negative over the term, even then your capital is protected. The key to investing in CPO funds is to invest at a time when the interest rates are high and the equity market is on their way up. This way you are able to lock in a high return on the debt component and also have the potential for a good return on the equity component.
CPO funds are suitable for people who need the money when the fund matures. If you require money in the interim, it's difficult to redeem the units and you will need to find a buyer on the bourses.
Capital protection funds, like all debt funds, incur a tax on capital gains but if the tenure is of three years or more, long term capital gains are taxed at 20% with indexation.
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