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This product is suitable for first time MF investors

G. Pradeepkumar, CEO, Union AMC

February 7th, 2017

In a nutshell

  1. Union AMC has launched the 7th series of its Cap Pro Fund suite, which endeavours to provide an equity upside by buying Index Call Options, even as the structure protects downside

  2. Pradeepkumar believes this is a good product for first time MF investors as well as those who aspire for equity upside but hesitate to invest in equity funds due to their risk aversion

  3. IFAs have historically not warmed up to this category as much as banks and NDs have - Pradeepkumar believes the category warrants IFAs' consideration as a low risk investment that can provide long term stability to client portfolios.

WF: What is your preferred investment strategy for the equity component in your Capital Protection Oriented Funds (CPOFs)?

Pradeepkumar: In all the previous series of our CPOFs, we have purchased Index Call Options under the equity component. Based on our past experience, buying Index Call Options for the equity component is one of the preferred strategies for our CPOFs.

WF: What are the pros and cons of choosing an option strategy involving Index Call Options in a Capital Protection Oriented product?

Pradeepkumar: The objective of Capital Protection Oriented Funds (CPOFs) as a product category is to provide better post tax returns as compared to the traditional debt investment avenues such as Fixed Deposits, by taking calculated exposure to the equity markets and to have an orientation towards protecting capital in case the equity market does not perform well.

For CPOFs, an investment strategy involving Index Call Options as compared to a long equity strategy is better if an investor has a positive view on the overall economy and on the equity market for the next three years. Option position by structure, enhances the participation level on the overall portfolio. The trade-off should work in the favour of the investor as the option strategy can provide better upside in a rising market. If the market level ends to be flat or negative at the time of maturity, the option strategy may provide very low or no return, which may be the case in a long equity strategy as well. In other words, since the debt portion of the fund is oriented towards capital protection at maturity, it is necessary and desirable to take a more aggressive call with the equity portion.

WF: Within option strategies, what are the pros and cons of active trading vs buy and hold strategy for CPOFs?

Pradeepkumar: Within option strategies, we feel that buying and holding strategy as compared to an active option trading strategy is more preferable under CPOFs as the cost of buying multiple options may be higher as compared to buying a single long dated option. Active option trading strategy can also turn out to be riskier as compared to a buy and hold long dated option strategy. Under active trading strategy, the fund manager will have to buy multiple options, during the tenure of the Scheme. If any one option during the tenure does not work in the Scheme's favour, then the fund manager might not have the ability to redeploy the funds in the equity component for the remaining tenure of the Scheme.

WF: How will the debt component under the Scheme be managed?

Pradeepkumar: We typically follow the guidelines given by the credit rating agency with respect to the quality of debt securities in the portfolio. In this Scheme as well, a high credit quality debt securities component is envisaged in the portfolio.

WF: CPOFs have historically been more popular with banks and National Distributors and relatively less with Independent Financial Advisors (IFAs). Is there a segment of the market that is better served by such funds, which you think IFAs should consider more seriously?

Pradeepkumar: According to us, CPOFs should be targeted towards investors who do not want to take a high level of risk on their invested capital but would like exposure to equities. This is suitable for first time Mutual Fund investors, who have been investing in traditional debt products so far, but would like to participate in the growth of the equity markets. Investors need to be prepared to keep the money locked for the tenure of the Scheme.

From an IFA's perspective, some portion of their client's portfolio can be invested in a low risk product such as CPOFs to provide stability from a long term perspective.

WF: What is the investment argument for this product at this juncture?

Pradeepkumar: We have a positive outlook on the Indian economy for the next three years. At the same time, it is also expected to be an eventful period with a blend of global and domestic macro events which could have a significant bearing on the Indian financial markets. An ideal product in such a scenario would be one that can provide participation on the upside but also aims to provide downside protection in case of significant market volatility.

The scheme is "oriented towards protection of capital" and not "with guaranteed returns". The orientation towards protection of capital originates from the portfolio structure of the scheme and not from any bank guarantee, insurance cover etc. The scheme will aim to protect the capital only at maturity & the NAV of the scheme may go up or down in the interim period.


The views expressed or statements made in this document are purely the views of the author and do not necessarily represent the views of either the Company or its affiliates.

The views expressed or statements made in this document are as of 7th February 2017, and can change without any notice.


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