Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Fooled by capital protection funds

Posted by Muthu on November 30, 2010

India’s national animal is tiger. No I’m not handling a primary class. We’ve may have to change the national animal in 2022. As per the data available, there are only around 3200 tigers left in the whole world and they are not expected to last beyond 2022.

How many million species are there in this planet and how many such have become extinct too? If you’ve time, browse the web. Otherwise, I would suggest reading Bill Bryson’s ‘A short history of nearly everything’ as a starting point.

What is the guarantee that like any other species human beings also may not cease to exist one day? In what way we are special except that we are the only species which regularly and very brutally kill the same species in the name of religion, ideology, race, and nation?  

Also never ever say that your job is easy, even if your value addition to your job is zilch. Enjoy with out opening your mouth. No HR or management would like to be told that they are fools to keep paying people for doing nothing, especially if your CTC is high.

When a Japanese minister said last week that his job was easy, he was fired because of public fury. Strange but true.  

My job is the most difficult one in the world and I’m working really very hard day and night. I sleep rarely. Trust me.

I got some good feedback from our readers on my last article regarding IPOs of real estate companies.

Real estate companies are starved of cash and they very badly need it to pay their interests and loans. Now access to banks looks like closed. Mutual Funds have been advised by SEBI not to invest in real estate debts.

Then where they will go for money? Underworld? I don’t know. But in all likelihood the real estate prices may correct as the promoters would be willing to reduce the price of the apartments and commercial space so that the cash starts flowing in.

Today they are looking for cash to survive, take care of working capital and service debts. Profits they will make, if they survive tomorrow.

Somehow I always feel that real estate and ethics don’t go together. This industry by its current design attracts lot of undesirable elements and things.

Can someone be ethical and run a real estate business? Again, I don’t know.

Whether anyone of you remember a company by name Alacrity Housing?

There have been flashy ads in all the newspapers last week by a fund house offering Capital Protection Fund. Some people were impressed with the ads and made some queries to me.

I understand from media that dozens of capital protection funds from various AMCs may hit the market in the near future.

In general, capital protection funds are designed to offer us more commission so that we gather more money from the investors for the AMCs. This would increase both the assets and income of AMCs.

It is of no use to you. Let me explain why.

Mutual funds cannot guarantee returns.

Simply protecting capital is no brainer. Only generating returns need some grey matter.

If you invest Rs.100/- in a capital protection fund for 3 years, all the fund house needs to do is invest Rs.83/- in a 3 year government bond, the present yield being around 7% p.a. So after 3 years you get your Rs.100/-. This is the easiest thing to do.

For doing this no brainer job, they charge 2.25% per annum. This means out of Rs.100/-, the AMC take Rs.6.75.

The balance Rs.17/- (in which Rs.2.25 is debited every year) can be invested in equities, interest rate swaps or any damn thing which the scheme allows and they can blow all the money also as their mandate is to protect only the capital.

You’ve the disadvantage of locking the money for 3 years. They would tell you it is listed in stock exchange and hence liquidity is there. Try selling a capital protection fund through stock exchange and you would understand the nonsense these people are talking.  

Also your capital is not protected if you chose to sell through stock exchanges at the prevailing NAV. Only if you stay fully invested for the entire period of 3 or 5 years then your capital is merely protected.

What is the fun in obtaining Rs.100/- from you today and simply returning it back after 3 or 5 years, thereby eroding your purchase power also due to inflation?

MIPs are the best mutual fund substitute equivalent to fixed deposits, though they neither guarantee capital nor provide assured returns. Read the ‘Maximize Monthly Income’ in our web portal for more details.

MIPs have a transparent portfolio, periodical updates, proven track record, open ended and there by offer easy liquidity. Do not fall prey to the word ‘Capital Protection’. You are more than capable of protecting your capital by simply keeping it in a locker.

If SEBI allows me to run a mutual fund, I would have only capital protection funds. Assuming I’ve a 100 crore corpus, some one is going to pay me Rs.2.25 crores every year for doing a job any fool can do. I would glad to be one.

All I’ve to do is to pay you exactly back what you paid me after 3 or 5 years, enriching myself in the process. What more I can ask? It’s time people like me allowed to become richer by running Wise Wealth Mutual Fund. I’ll offer you capital protection series every week, subject to regulator’s approval.

I think it’s high time SEBI asks AMCs not to use the words ‘capital protection’, as conservative investors are immediately lured into the trap. 

One Response to “Fooled by capital protection funds”

  1. Vijay said

    Does that mean these fund houses are targeting people’s ignorance? I am curious how many investors invest lured by advertisements in the media? I had been one in the past. I welcome this article that whoever visit this page will not invest.

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