CAPITAL PROTECTED HYBRID FUND

PLAN N CREATE YOUR OWN
CAPITAL PROTECTED HYBRID FUND
in easy ways

You could have seen many Mutual Funds promoting and managing such capital protected , hybrid funds which are normally closed end funds . You would be wondering how they can protect your investment while investing in markets which are prone to risks . Your experience shows that you have lost money many times while investing in stock markets . You would be thinking that they have some sophisticated fund managers who create such miracle funds with their immense knowledge of markets where they will never lose . In fact , one can create his own capital protected , hybrid fund in easy ways . Some knowledge of investment avenues will help . In fact if we create our own such fund , we will be saving on the management fees , MFs charge which will be substantial . We show you the way

First thing to understand is “ All fixed income products are capital protected funds . “ Hence whatever you invest in products like Bank Deposits will be capital protected . But while investing in fixed income , your returns are also fixed . Hence to give flexibility of return to your investment , you have to add some risky products which have chance of higher returns . So a hybrid , viz investment containing fixed income and stocks , will have a combination of capital protection and possible higher return . We will show how one can create such funds with suitable proportion of each component . Before starting such funds , you must analyse the purpose and period for which you want to create such fund in order to make a suitable strategy .

For example , you have Rs 10.00 lakhs funds now . You may want to build your wealth based on this fund or you may need it after 5 years for arranging a marriage . You know that you will be able to manage marriage you want to perform with in Rs 10 .00 lakhs you have now , keeping in view of the inflation , cost escalation or any other reason . So you need this Rs 10.00 lakhs to be saved for next 5 years . Or you just want to build this fund for 30 years when you are going to retire . You can invest this amount in to a bank’ s fixed deposit for 5 years which will give an average yield of 8%pa to 9 %pa before tax . If you are in the income tax bracket of 20 % , yield will reduce to around 6.5 % to 7.5 % pa . It is the safest way of investment. Now you are tempted by stock market advisors that market in ripe now to invest which they hope will give a return of around 20 % pa minimum without tax . You are tempted by the greed of making triple of your money in next 5 years . You are also worried what will happen if markets tumble back to 2013 level . You may lose half of your investment . You are caught between the temptation of making money three times and fear of losing money and unable to perform the marriage or save for retirement . . So Capital protected hybrid fund will be an ideal middle path by which you will be having your investment of Rs 10.00 lakh protected while you may gain if market moves upward as predicted by your advisors . If market goes back to 2013 level , you will still have your investment to meet your goal . One important point to be noted is that Capital is protected and not the returns . One should be prepared to sacrifice entire interest otherwise he or she would have earned otherwise .

3 STEPS FORMULA FOR CREATING CAPITAL PROTECTED HYBRID FUND :

1. Determine how much funds you can set aside for your future and the period for which you can invest

2. Invest portion of funds in Fixed income assets like Bank Deposits , NSC etc that will give maturity value as your total original investment .

3. Balance amount invest in High risk – High Return investments like equity , mutual fund etc .

A simple guide for creating Capital Protected Hybrid funds :

1. Arrive the amount and period you can invest without requiring such funds till maturity . Such amount should be investable for long periods only without you requiring in any way for present or near future . Say you have Rs 10.00 Lakhs for 5 years .

2. Go to your bank or online portals which give you the amount you need to invest now to get back Rs 10.00 lakhs after 5 years ( Presently many banks are offering 8.75 % pa interest ) and the amount needed is Rs 6.5 Lakhs for a resident Indian who is not a senior citizen .

3. Now if you invest Rs 6.5 lakhs now , you will get Rs 10.00 lakhs and your need of Rs 10.00 lakhs after 5 years is met . If you are an income tax payer , you may have to invest more for adjusting tax payments accordingly . Say you have to invest Rs 50,000 more for tax purpose . Total investment is Rs 7.00 lakhs .First aim of Capital protection for 5 years is achieved .

4. The balance Rs 3.00 lakhs is left with you to invest in equity related instruments . Now you can go to your stock advisor , analysts or your brokers and get their opinion on around 20 stocks they recommend .

5. You study those companies past performance , management and growth expectation and pick around 10 stocks , preferably in different segments . If you are not sure of your ability to analyse the companies ‘ performance , you can buy 10 different types of Equity Mutual Funds .
Now you invested a portion of money in Fixed income and a portion in equity and you have made your fund a Hybrid Fund

Probable result after 5 years :

1. If your advisors and your study of companies prove correct , and if in deed share prices have tripled , your equity portion will zoom to Rs 9.00 lakhs and your total fund including Bank deposit will be Rs 19.00 lakhs which works out an average 13 % pa against bank interest of 8.75 % pa . If advisors are more than correct and markets exceeds all expectations , you may probably make much more.

2. If your equity portion underperforms and at the worst case all your investment is lost , still you will be left Rs 10.00 lakhs what you originally invested . You would have no return on your investment and you will still be able to conduct marriage with the funds .

3. Actually the performance of equity funds may be in between the extremes and hence your return ranges between 0% pa to 19 % pa and beyond.

Customising Capital Protected Hybrid funds :

1. If you want any particular percentage of your return protected , you may increase the portion of bank deposit accordingly . As you increase the bank deposit portion , higher yield probability reduces .

2. If you want to exit the equity portion fully or partially , ( Either to protect the profits made or to prevent further losses ) you can do so as you have full control of your equity portion . You may also have your entry and exit as and when you want .

3. If you have good knowledge of stock market as well as futures and options and you have great apatite for risks , you may invest a small percentage of equity portion for playing in derivative market where returns are high and so the risks . Be aware that only buying option either call or put only has limited risk . Any selling position in options has unlimited risk and hence to be totally avoided . . Even in buying options , you may lose 100 % of money paid as premium . Remember derivatives are an high risk area even for professionals .

4. If you have no or little knowledge of stock market , you may go in for equity based mutual funds for your equity portion . Even though they charge a fee , it is better than entering the market blindly . You may seek professional help for selecting mutual funds . Again do not put all your money in a single or single type of mutual funds .

ADVANTAGES OF YOUR OWN CAPITAL PROTECTED HYBRID FUND :

1. You are the master of your fund and you can mange keeping best of your interest .

2. You create the fund totally tailored to your needs whether capital protection , interest protection , period of investment or choice of equities

3. You can know on daily basis how your fund is performing and you can exit any time .

4. No management fee or hidden fee paid to any third party .

5. You can exit equity portion any time you want . You can also pre- close bank deposits in case of need . Remember banks charge for premature closure and you may lose a small portion of interest .

RISKS OF CAPITAL PROTECTED HYBRID FUNDS :

1. You may not be able to gauze the movement of market prices and move out in case of panic either in a particular share you have invested or stocks in total .

2. You are risking the interest portion , otherwise received through a fixed deposit , by investing in stock market . There is no free lunch .

3. Your investing or trading ability in stocks may be limited and you may commit fatal mistakes while selecting stocks or mutual funds .

4. You may not be able to pay proper attention to the equity portion on a daily basis

Creating Long Term Wealth using Capital Protected Hybrid funds :

You can build long term wealth using Capital Protected Hybrid funds by simply renewing the funds after every maturity in following way :

1. What ever maturity amount you receive after the period , reinvest a portion in fixed income plan to receive the equivalent fund after next maturity . In the previous example, Say you have got Rs 14.00 lakhs after 5 years . Let us assume that bank interest would be at 9% pa then for 5 years period . Then invest Rs 9.00 lakhs as fixed deposit out of Rs 14.00 lakhs for a period of 5 years to get maturity amount of Rs 14.00 lakhs .

2. Invest in equities the balance of Rs 5.00 Lakhs .

This exercise you can go on repeating till you require your fund say for retirement . You can build a long term wealth by protecting your capital in every stage of your investment .

DISCLAIMER :

No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.