Dual Advantage Funds



A number of fund houses in India have launched closed-ended schemes which mostly invest in debt instruments but some amount is also invested in equity schemes. It means, as an investor in these funds, you have a chance to get something more than what you can get from the debt portfolio. These funds are being categorised as dual advantage funds, multiple yield funds, etc, and are gaining popularity among investors.

What is the basic idea behind such funds? In such schemes, your initial investment amount is protected by the fund manager by investing a large portion of it (which could be in the range of 80 to 85%) in debt investments. This portion is invested in interest paying instruments in such a way that at maturity, say three years, the investment and the interest generated together should equal your initial investment.

The remaining 15% is invested in equities. So at the end of the third year, that equity portion is expected to grow so that your total return is something more than your initial investment. Theoretically, even if the value of this 15% in equities turns to nothing, still your capital is protected.

These look like capital protection oriented schemes (CPOS), but there are some differences between the two. In CPOS, there are several restrictions on the fund manager as to where he / she could invest. For example he/ she has to invest in only the top quality (AAA-rated) instruments.

Most of the restrictions in CPOS are not there in dual advantage funds. For example, in a dual advantage fund, the fund manager has the leeway to invest in instruments having slightly lower rating than AAA, say in AA+ rated instruments. This slightly lower rating can bring in higher yield, which in turn allows the fund manager to invest a slightly lower amount of funds in debt instruments and thus a slightly higher amount of funds in equities. If the equity portion gives a good return, the total return at maturity will be higher.

In a way, dual advantage schemes are like FMP (fixed maturity plan)-plus schemes, where the equity portion brings in the kicker, the `plus' factor. "Because of the higher yield in debt instruments in the portfolio, potential for higher return from equity is higher. In dual advantage funds, there is not duration call and the investor's principal is protected.

For an investor, this is a scheme in which the investment horizon of the investor is fully in sync with the investment horizon of the fund manager. In most dual advantage funds in the market, the investment horizon is three years.

Once invested in these funds, investors are also protected from market volatility since these are closed ended funds with very limited option to exit.

However, fund industry players cautioned that there is no guarantee in these funds.