DECODED: Sundaram Capital Protection Oriented Fund 3 yrs-Series 9
Nov 16 2012
FEATURES: A close-ended fixed income fund with a partial equity orientation, this fund is the latest in a series of similar hybrid close-ended funds by Sundaram Mutual Fund, nineth as far as three-year tenured ones are concerned, which try to attract using the term ‘capital protection’ in their names.
TENURE & BENCHMARK: It is a three-year tenured scheme benchmarked to Crisil MIP Blended Index.
ASSET ALLOCATION & INVESTMENT STRATEGY: Scheme document states it will invest 80-100 per cent in debt securities and up to 20 per cent in equities. Debt portfolio will mainly be in triple-A-rated non-convertible debentures (NCDs) and if enough of these are not available, then in bank certificate of deposits (CDs) of public-sector banks. Securitised debt and securities of four sectors – real estate, micro finance, airlines and information technology – will not be invested in. Equity portion will be re-balanced on a dynamic basis.
PEER PERFORMANCE: Five schemes, series two to six, of Sundaram’s earlier three-year capital protection-oriented schemes, operational between December 2010 and October 2011, have delivered an average one-year return of 8.03 per cent as on November 12 NAVs from Capitaline NAV database. This is significantly lower than 9.37 per cent average one-year return of 14 peer three-year cap-protection schemes of other mutual funds. Crisil MIP Blended Index had a one-year return of 10.12 per cent.
FC VERDICT: Like every scheme with ‘capital protection’ in their name, this scheme too, does not guarantee capital protection. The scheme’s investment objective is only oriented towards protecting your principal investment. But being a three-year scheme, if you only get back, say Rs 100, principal at the end of three years, you have actually lost risk-free interest on bank deposits, which at 8 per cent per annum amounting to roughly Rs 24. You get your Rs 100 back but you would have got Rs 124 back in a bank. Your minimum expectation should, therefore, be Rs 124 and not Rs 100 from a three-year investment. For this hybrid debt-equity scheme to give you Rs 124 at the end of three years, and assuming Rs 20 out of the principal to be invested in equities (as per maximum limits in asset allocation) to fetch, in a worse case scenario, say, only Rs 10, the debt portfolio will have to be invested in securities yielding 12.53 per cent compound annual growth rate (CAGR). A 12.5 per cent CAGR is not quite easy to get from triple-A-rated NCDs or bank CDs. This, along with below-average performance of peer three-year schemes within Sundaram MF, makes the scheme avoidable for investment purpose.