Capital Protection Funds

A Capital Protection-Oriented Fund is a closed-end hybrid fund designed to minimize downside risk while offering growth potential. It aims to safeguard investors' capital during market downturns and capitalise on equity market upturns. However, capital protection is not guaranteed in India.
EXPLORE FUNDS
What is Capital Protection Fund
EXPLORE FUNDS
4 mins
10-March-2025

Capital protection funds are specialised close-ended hybrid investment options designed to offer investors the potential for equity-like returns while also providing some security. These funds aim to safeguard the capital of investors during market downturns while also allowing for capital appreciation during market upswings. The primary goal of capital protection mutual funds is to protect investors' capital in times of market volatility. Simultaneously, they aim to capitalise on the equity market's potential for growth. This article covers what is a capital protection mutual fund, how capital protection funds operate, what are the uses of capital protection funds, and much more.

What is a capital protection mutual fund?

A type of structured financial instrument that ensures a specified minimum value upon maturity alongside potential growth opportunities. Products featuring capital protection offer the chance for profits while safeguarding a portion or the entirety of the initial investment.

Capital protection funds have served as a shield against economic shocks for centuries. They operate by acquiring assets expected to depreciate in value and retaining them until their prices rebound. This strategy not only safeguards investors' funds but also contributes to economic stability during periods of uncertainty and downturns.

Governments establish capital protection funds to shield investors from unforeseen financial losses. By selling shares to the public and imposing investment limits, the government manages risk exposure. If share prices fall below a predetermined threshold, the government may raise investment limits or repurchase shares. These funds typically offer protection to investors during stock market crashes.

Managed by the government, capital protection funds aim to protect national assets during economic downturns. Originating in response to the 2008 global financial crisis, these funds are essential for maintaining economic stability at a national level.

Within the financial system, capital protection funds serve a critical role. They act as a cushion against broader economic downturns, helping to preserve asset values and providing a safety net for individuals facing unemployment. By shielding investors from unexpected declines in asset values, these funds contribute to economic stabilisation and investor confidence.

How capital protection funds operate?

These funds are typically close-ended hybrid schemes, with approximately 80% of the portfolio invested in fixed-income instruments like bonds, certificates of deposit, and treasury bills. The remaining portion is allocated to equity and equity-related instruments, such as convertible debentures, preference shares, warrants, and derivatives, following SEBI guidelines. Capital protection funds aim to strike a balance between protecting the invested capital and generating returns by diversifying the portfolio with both low-risk and higher-risk assets.

Where do capital protection funds invest?

Capital protection funds strategically allocate investments between fixed-income securities and equities to ensure principal safety while offering growth potential. These are closed-ended hybrid mutual funds, with a primary focus on debt instruments to safeguard capital. The fund's allocation between debt and equity depends on bond yields and the investment tenure.

A large portion of the corpus is allocated to high-rated fixed-income instruments, ensuring stable returns. The remaining amount is invested in equities to provide potential growth. The debt component is managed in a way that ensures its returns are sufficient to match the initial investment amount, preserving the principal.

Typically, capital protection funds invest around 80% in secure debt instruments, such as AAA-rated bonds, and the remaining 20% in equities. This structure helps cushion the impact of market volatility, ensuring that even if the equity market fluctuates, the principal remains protected.

Example

Consider a capital protection fund with an initial corpus of Rs. 10,000. The fund invests approximately Rs. 9,174 in debt instruments with a 9% yield for one year. By the end of the tenure, the value of this debt investment grows to Rs. 10,000, ensuring capital protection. The remaining Rs. 826 is allocated to equities, and any gains from this portion represent the fund's potential upside.

What are the uses of capital protection funds in India?

Particulars

Details

Supporting financial institutions

Capital protection funds provide financial guarantees to banks and other financial institutions, ensuring their solvency and reducing the risks they pose to the economy. They are also referred to as financial stability funds or funds for bank recapitalisation.

Hybrid funds for capital protection

These closed-end hybrid funds focus on safeguarding investors' capital during market downturns while enabling participation in stock market upswings to benefit from capital appreciation.

Guaranteed return bonds

Bonds offering guaranteed returns provide exposure to the stock market with the promise of higher returns alongside a safety net. They ensure fixed capital payments at specified times or upon death.

Diverse investment options

Capital protection funds offer various investment avenues such as certificates of deposit, fixed annuities, fixed indexed annuities, high-yield savings accounts, money market accounts, treasury bonds, treasury inflation-protected securities, and whole life insurance, among others.

Eligibility and business benefits

To comprehend the functioning of the capital guarantee fund, understanding eligibility criteria and benefits to businesses is essential. Established in 1933, this fund has supported companies by providing a financial safety net in case of loan default. By preventing unexpected business interruptions, it enables normal business operations while issues are resolved.

 

Who should invest in capital protection funds?

Capital protection funds are best suited for investors with certain preferences and financial goals. You should consider investing in capital protection funds if you are:

  • Risk-averse investors: If you are risk-averse and want to protect your capital from market downturns, capital protection funds are an ideal choice. These funds provide a level of security akin to fixed deposits while also offering the potential for equity-like returns.
  • Avoiding interest rate volatility: For those who wish to avoid the interest rate fluctuations associated with traditional fixed-income investments, capital protection funds can be a suitable alternative. The debt component of these funds provides stability.
  • Matching investment horizon: When your investment horizon aligns with the tenure of a capital protection fund (typically 3-5 years), it can be a strategic choice. These funds are best for those who can commit their funds for the specified period.

Also read - What are mutual funds?

Allocation of capital protection funds

Capital protection funds are a blend of fixed-income securities, such as zero-coupon debt, and equity investments. This combination aims to provides investors with principal protection through the fixed-income segment of the portfolio while allowing for additional gains from the equity portion. Portfolio managers structure these funds to ensure capital protection.

Top-performing mutual funds

Equity

Debt

Hybrid

Tax saver

View All
View all

Benefits of capital protection funds

  • Capital protection: Investing in capital protection funds is ideal for risk-averse investors who want to benefit from equity investments while safeguarding their principal amount. These funds strike a balance by allocating 80% to highly rated debt instruments and the remainder to equity. When equity markets perform well over the fund's tenure (usually 3-5 years), investors can witness substantial growth. In adverse scenarios, their capital remains protected.
  • Balanced portfolio: These funds provide a balanced investment portfolio that combines fixed-income securities, typically zero-coupon debt, and equity investments. This balance allows investors to enjoy the security of fixed-income instruments while still benefiting from potential equity market gains.

Also read - Different types of mutual funds

When to consider capital protection funds

  • During  market volatility with medium to low inflation levels.
  • If you are averse to interest rate volatility.
  • When you want to participate in equities while minimising the associated risks.
  • When your investment horizon aligns with the fund's tenure.

Capital protection funds offer a suitable option for individuals with specific financial goals who wish to secure a portion of their initial investments without forgoing the benefits of equity investments. It is important to note that the Scheme is “oriented towards protection of capital” and not “with guaranteed returns”. Further, the orientation towards protection of the capital originates from the portfolio structure of the scheme and not from any bank guarantee, insurance cover etc.

Are capital protection funds better than fixed deposits?

When prioritising capital safety, capital protection funds surpass Fixed Deposits (FDs). These funds typically yield superior post-tax returns compared to other fixed-income options such as fixed maturity plans.

How do I choose a capital protection fund?

When selecting an investment scheme, it is crucial to align your choice with your investment objectives, risk tolerance, and liquidity needs. Prior to opting for a capital pr, and liquidity needs. Prior to opting for a capital protection fund, it's advisable to consider the following factors.

Firstly, thoroughly examine the investment objective of the fund to ensure it aligns with your own investment goals and preferences.

Secondly, check the rating assigned by Credit Rating Information Services of India Limited (CRISIL) to the capital protection-oriented schemes. This rating indicates the likelihood of the portfolio value dropping below the initially contracted principal value, or the assurance of investors receiving their entire investment back. It's essential to verify the CRISIL rating or the specific scheme's rating.

Thirdly, evaluate whether the tenure of the scheme corresponds with your investment horizon, ensuring it suits your financial goals and timeframe.

Lastly, pay close attention to the asset allocation strategy outlined in the fund's offer document. Understanding the risks undertaken by the fund manager to potentially boost returns is paramount. Carefully assessing these risks can help you make an informed decision about whether the fund aligns with your risk tolerance and investment objectives.

Risks and considerations in capital protection funds

While capital protection funds prioritise safeguarding your principal investment, they are not entirely free from risks. Here are some key factors to consider:

  1. Market Fluctuations – Although a major portion of the fund is invested in fixed-income securities, the equity allocation remains exposed to market volatility. A downturn in the stock market can impact overall returns.
  2. Credit Risk – The debt instruments within the fund carry credit risk, meaning there is a possibility that the issuer may default on payments, which could affect fund performance.
  3. Interest Rate Sensitivity – Fluctuations in interest rates can influence the value of debt securities in the portfolio, leading to potential gains or losses.
  4. Fund Management Risk – The fund’s success relies on the investment strategies and decisions of the fund manager. Ineffective management or poor allocation strategies can negatively affect returns.

Conclusion

In conclusion, capital protection funds emerge as a compelling investment option for those seeking to safeguard their capital while aiming for potential returns. These funds offer a balanced approach by combining elements of fixed-income securities with equity investments, providing investors with a level of capital protection alongside growth opportunities. With their focus on preserving the principal amount, capital protection funds mitigate downside risks and offer a degree of assurance in uncertain market conditions.

However, it is crucial for investors to conduct thorough research, considering factors such as the fund's investment objective, credit rating, tenure, and asset allocation strategy. By carefully assessing these aspects and aligning them with their investment goals and risk tolerance, investors can make informed decisions regarding capital protection funds to optimise their investment portfolios.

Essential tools for all mutual fund investors

Mutual Fund Calculator

Lumpsum Calculator

Systematic Investment Plan Calculator

Step Up SIP Calculator

SBI SIP Calculator

HDFC SIP Calculator

Axis SIP Calculator

ICICI SIP Calculator

Nippon India SIP Calculator

ABSL SIP Calculator

LIC SIP Calculator

Kotak Bank SIP Calculator

Frequently Asked Questions

Are capital preservation funds safe?

Capital preservation funds aim to protect the principal amount by primarily investing in high-quality debt instruments. However, they are not entirely risk-free, as they are subject to interest rate fluctuations, credit risk, and limited equity exposure, which may impact returns.

What is a capital protection fund?

A capital protection fund is a mutual fund that prioritizes capital preservation over high returns. It invests primarily in fixed-income and debt instruments to protect investor capital, with a smaller portion allocated to equities for potential modest gains, balancing stability and growth.

What is the typical investment horizon for capital protection funds?

Capital protection funds are closed-end, meaning they have a fixed maturity date. Depending on the specific fund, the investment horizon can vary from 1 to 5 years, aligning with the fund's structure and investor goals.

How do capital protection funds differ from fixed deposits?

Capital protection funds offer exposure to equities, enabling potential for higher returns than fixed deposits (FDs), which provide fixed interest rates. However, FDs guarantee returns, whereas capital protection funds involve market-linked risks, though mitigated by a debt-heavy allocation.

Who should consider investing in capital protection funds?

Conservative investors prioritizing capital safety and moderate returns may find capital protection funds appealing. These funds are ideal for first-time investors, retired individuals, and those seeking stability with some growth potential through limited equity exposure.

Are returns on capital protection funds guaranteed?

No, returns on capital protection funds are not guaranteed, as they are market-linked. Though primarily invested in stable debt instruments, they carry interest and credit risks, with equity exposure adding market volatility. Careful review of fund strategy and track record is recommended.

Can investors access their funds before the maturity date?

Capital protection funds are closed-end, so investments cannot be redeemed before maturity. Investors must commit their capital for the full investment horizon, which ranges between 1 to 5 years, based on the specific fund chosen.

What factors should I consider when choosing a capital protection fund?

When selecting a capital protection fund, consider factors like investment objective, risk profile, maturity period, asset allocation, and expense ratio. Reviewing these aspects helps align the fund's strategy with your financial goals and risk tolerance.

Show More Show Less

Related Videos

Bajaj Finserv app for all your financial needs and goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-qualified limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on Easy EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more

GET THE APP

Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.


Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.