Coming to the concept of capital protection-oriented funds, asset management companies (AMCs) launch these funds with both debt and equity components.
If it were done with debt only, it would be similar to fixed maturity plans (FMPs) and FMPs sell even without the comfort of capital protection orientation. The equity component (around 20% of the portfolio) gives participation in the potential upside (meaning higher returns) from the equity market, while the debt component (around 80% of the portfolio) ensures capital preservation by virtue of the defined maturity date of these instruments.
As per the rules of the Securities and Exchange Board of India (Sebi), an MF scheme cannot use the term “guarantee” or “capital protection” in its name, but can use the term “capital protection-oriented” if it abides by certain requirements. These requirements are that there has to be a credit rating for the scheme and the debt component should grow to the initial amount invested (i.e. the principal amount) over the tenor of the scheme.