Capital Protection Funds Are Bad for Investment

Unstable markets cause stress and sleepless nights to the small investors; however mutual funds use them as an opportunity to put up structured products to sale. The uncertainty recently caused by the markets launched 9 capital protection-oriented funds and even more such offerings are forthcoming. But these funds do not necessarily live up their name and make a successful investment.
A capital protection is a hybrid close-ended fund that invests 80% of its fixed assets in debt. Over the plan’s term, the debt continues to grow to the principal to ensure that the capital is ‘under protection’. At the same time, the portion invested in the stocks helps to boost the returns.
The mutual funds declare that this gives you as an investor the best possible: your capital is under protection in case if the markets do not perform well, and you get income if the stock prices are rapidly increasing. However, this is just a theory. What really happens is that capital protection funds have grinded out rather non-vital returns in the past years. According to the statistics, the best funds have given returns of 16%, while the average funds have given about 6%.
The model of these funds is based on the idea to give better returns than fixed income and protect capital. But the upside potential has not come through because of the high instability of the equity markets.
These returns have come through a period of the high inflation levels. The mediocre inflation rate has been 7% in the period of last three years, which means that the fund that was earning 7% returns was unable to grow your income but erode its value. This challenges a question of the concept of capital protection. There is no merit in investing in this kind of funds, because the returns cannot be compared to those of bank fixed deposits.
Experts claim that even if the main objective is capital protection, the structured products are still a bad option. As a rule, retail investors find this a comforting and tempting option, but it is not a good way of capital protection even if you are a risky person. One can gain the same aim by putting a significant sum in the scheme of the post office monthly income and using the income to begin a systematic plan of investment in the diversified equity fund.
As you already know, capital protection funds are the closed-circuit products and naturally the funds do not buy back before the end of the term. If you decide to stop before the maturity of the term, you will have to sell all the units on a stock exchange. However, as a rule, there are no sellers or buyers in this section, which makes the funds unmarketable. On the other hand, setting up your own fund, you will be able to give it up at any time. While the whole income earned from a capital security fund is assessable, a percentage of the wage of the DIY fund will enjoy charge exception.
About the author: Scott Sanford is an American blogger and former journalist. He is the author of dozens of articles on Business and Finance. Currently, he works as an academic writer at http://englishhomeworkhelp.co.uk/.