Invest when rates are high by Priya Sunder

Shivaram (name changed), a director with an IT company, came to me for advice on where he could invest the bonus that he just earned. He wanted to invest the money in something that was very safe and gave him a 15-20% return. In addition, he wanted the money back after a year. I told him that if I found an investment that fit his bill, I would quit being an adviser and put all my money in that investment! In the world of investment, if you want high returns, you must be willing to take higher risks.

This classic risk-reward trade-off has left many in search of something that defies this rule. Clearly, we would all be wealthier and happier if we could get high returns with low risk.

Although tough to find, but some closed-ended funds such as 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.