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CAPITAL PROTECTED HYBRID FUND
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EASY WAY TO CREATE OWN HYBRID FUND     Written by     Mr  Manjunathan Bellur You could have seen many Mutual Funds promoting and managing such capital protected , hybrid funds which are normally closed end funds .  You would be wondering how they can protect your investment while investing in markets which are prone to risks . Your experience shows that you have lost money many times while investing in stock markets . You would be thinking that they have some sophisticated fund managers who create such miracle funds with their immense knowledge of markets where they will never lose . In fact , one can create his own capital protected , hybrid fund in easy ways . Some knowledge of investment avenues will help . In fact if we create our own such fund , we will be saving on the management fees , MFs charge which will be substantial . We show you the way First thing to understand is  “ All fixed income products are capital protected funds . “ Hence whatever you invest in  products like Bank Deposits will be capital protected . But while investing in fixed income , your returns are also fixed .  Hence to give flexibility of return to your investment , you have to add    some risky products which have chance of higher returns . So a hybrid , viz investment containing fixed income and stocks , will have a combination of capital protection and  possible higher return . We will show how one can create such funds with suitable proportion of each component . Before starting such funds , you must analyse the purpose and period for which you want to create such fund in order to make a suitable strategy . For example , you have Rs 10.00 lakhs funds now . You may want to build your wealth based on this fund or  you may  need it   after 5 years for arranging a marriage . You know that you will be able to manage marriage you want to perform with in Rs 10 .00 lakhs you have now , keeping in view of the inflation , cost  escalation or any other reason . So you need this Rs 10.00 lakhs to be saved for next 5 years . Or you just want to build this fund for 30 years when you are going to retire . You can invest this amount in to a bank’ s fixed deposit for 5 years which will give an average yield of 8%pa to 9 %pa  before tax . If you are in the income tax bracket of 20 % , yield will reduce to around 6.5 % to 7.5 % pa . It is the safest way of investment.  Now you are tempted by stock market advisors that market in ripe now to invest    which they hope will give a return of around 20 % pa minimum  without tax . You are tempted by the greed of making  triple of your money in next 5 years . You are also  worried what will happen if markets tumble back to 2013 level . You may lose half of your investment . You are caught between the temptation of making money three times and fear of losing money and unable to perform the marriage or save for retirement . . So Capital protected hybrid fund will be an ideal middle path  by which you will be having your investment of Rs 10.00 lakh protected while you may gain if market moves upward as predicted by your advisors .  If market goes back to 2013 level , you will still have  your investment to meet your goal .   One important point to be noted is that Capital is protected   and not the returns . One should be prepared to sacrifice entire interest otherwise he or she would have earned otherwise . 3 STEPS FORMULA FOR CREATING CAPITAL PROTECTED HYBRID FUNDÂ
1.    Determine how much funds you can set aside for your future and the period for which you can invest
2.    Invest  portion of funds in Fixed income assets like Bank Deposits , NSC etc  that will give maturity value as your total original investment . 3.    Balance amount invest in  High risk – High Return investments like equity , mutual fund etc .    A simple  guide for  creating Capital Protected Hybrid fundsÂ
1.    Arrive the amount and period you can invest  without requiring such funds till maturity . Such amount   should be investable for long periods only without you  requiring in any way for present or near future .   Say you have Rs 10.00 Lakhs for 5 years .
2.     Go to your bank  or online portals  which give you  the amount you need to invest now to get back Rs 10.00 lakhs after 5 years ( Presently many banks are offering 8.75 % pa interest )  and the amount needed is Rs 6.5 Lakhs for a resident Indian who is not a senior citizen . 3.    Now if you invest Rs 6.5 lakhs now , you will get Rs 10.00 lakhs and your need of Rs 10.00 lakhs  after 5 years is met . If you are an income tax payer , you may have to invest more   for adjusting tax payments accordingly  . Say you have to invest Rs 50,000 more for tax purpose . Total investment is Rs 7.00 lakhs .First aim of Capital protection for 5 years is achieved . 4.     The balance Rs 3.00 lakhs is left with you to invest in equity related instruments  .  Now you can go to your stock advisor , analysts or your brokers and get their  opinion on around  20 stocks  they recommend . 5.    You study those companies past performance , management and  growth expectation   and pick around 10 stocks , preferably in different  segments . If you are not sure of your ability to analyse the  companies ‘ performance , you can buy 10 different types of Equity Mutual Funds . Now you invested a portion of money in Fixed income and a portion in equity and you have made your fund  a Hybrid Fund |
MANJUNATHAN BELLUR
Studied Physics from Bangalore University , Worked for Indian Overseas Bank for 39 years Lived in Shimoga, Bangalore , Mumbai , Chennai, Kolkatta , Coimbatore , Hubli & Hongkong Retired as Chief Regional Manager , Hubli Presently living in Mysuru , India   HAVE CAKE AND EAT IT TOO
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Probable result after 5Â yearsÂ
1.    If your advisors and your study of companies prove correct , and if in deed   share prices have tripled , your equity portion will zoom to Rs 9.00 lakhs and your total fund including Bank deposit will be Rs 19.00 lakhs  which works out an average  13 % pa against bank interest of 8.75 % pa .  If advisors  are more than correct and markets exceeds all expectations , you may probably make much more.Â
2.    If your equity portion underperforms and at the worst case all your investment is lost , still you will be left Rs 10.00 lakhs what you originally invested . You would have no return on your investment and you will still be able to conduct marriage with the funds .
3.    Actually the performance of equity funds may be in between the extremes and hence your return ranges between 0% pa to 19 % pa and beyond.Â
2.    If your equity portion underperforms and at the worst case all your investment is lost , still you will be left Rs 10.00 lakhs what you originally invested . You would have no return on your investment and you will still be able to conduct marriage with the funds .
3.    Actually the performance of equity funds may be in between the extremes and hence your return ranges between 0% pa to 19 % pa and beyond.Â
Customising Capital Protected Hybrid funds
1.     If you want  any particular percentage of your return protected , you may increase the portion of bank deposit accordingly .   As you increase the bank deposit portion ,  higher yield probability reduces .
2.    If you want to exit the equity portion fully or partially , ( Either to protect the profits  made or to prevent further losses ) you can do so as you have full control of your equity portion .  You may also have your entry and exit as and when you want .
3.    If you have good knowledge of stock market as well as futures and options and you have great apatite for risks   , you may invest a small percentage of equity portion for playing in derivative market  where returns are high  and so the risks .  Be aware that  only buying option either call or put only has limited risk . Any selling position in options has unlimited risk and hence to be totally avoided . .  Even in buying options , you may lose 100 % of money paid as premium . Remember derivatives are an high risk area even for professionals .
4.      If you have no or little knowledge of stock market , you may go in for equity based mutual funds for your equity portion . Even though they charge a fee , it is better than entering the market blindly . You may seek professional help for selecting mutual funds . Again do not put all your money in a single or single type of mutual funds .Â
2.    If you want to exit the equity portion fully or partially , ( Either to protect the profits  made or to prevent further losses ) you can do so as you have full control of your equity portion .  You may also have your entry and exit as and when you want .
3.    If you have good knowledge of stock market as well as futures and options and you have great apatite for risks   , you may invest a small percentage of equity portion for playing in derivative market  where returns are high  and so the risks .  Be aware that  only buying option either call or put only has limited risk . Any selling position in options has unlimited risk and hence to be totally avoided . .  Even in buying options , you may lose 100 % of money paid as premium . Remember derivatives are an high risk area even for professionals .
4.      If you have no or little knowledge of stock market , you may go in for equity based mutual funds for your equity portion . Even though they charge a fee , it is better than entering the market blindly . You may seek professional help for selecting mutual funds . Again do not put all your money in a single or single type of mutual funds .Â
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ADVANTAGES OF YOUR OWNÂ Â CAPITAL PROTECTED HYBRID FUND
1.     You are the master of your fund  and you can mange keeping best of your interest .
2.    You create the fund totally tailored to your needs whether capital protection , interest protection , period of investment or choice of equities Â
3.    You can know on daily basis how your fund is performing and you can exit any time .
4.    No management fee or hidden fee paid to any third party .
5.    You can exit  equity portion any time you want . You can also pre- close bank deposits in case of need . Remember banks charge  for premature closure and you may lose  a small portion of interest .Â
2.    You create the fund totally tailored to your needs whether capital protection , interest protection , period of investment or choice of equities Â
3.    You can know on daily basis how your fund is performing and you can exit any time .
4.    No management fee or hidden fee paid to any third party .
5.    You can exit  equity portion any time you want . You can also pre- close bank deposits in case of need . Remember banks charge  for premature closure and you may lose  a small portion of interest .Â
RISKSÂ Â OFÂ CAPITAL PROTECTEDÂ HYBRID FUNDSÂ
1.     . You may not be able to gauze the movement of market prices and move out  in case of panic either in a particular share you have invested or stocks in total .
2.    You are risking the interest portion , otherwise received through a fixed deposit , by investing in stock market .  There is no free lunch .
3.    Your investing or trading ability in stocks may be limited and you may commit fatal mistakes while selecting stocks or mutual funds .
4.    You may not be able to pay proper attention to the equity portion on a daily basis Â
2.    You are risking the interest portion , otherwise received through a fixed deposit , by investing in stock market .  There is no free lunch .
3.    Your investing or trading ability in stocks may be limited and you may commit fatal mistakes while selecting stocks or mutual funds .
4.    You may not be able to pay proper attention to the equity portion on a daily basis Â
Creating Long Term Wealth using     Capital Protected Hybrid funds
You can build long term wealth using Capital Protected Hybrid funds by simply renewing the funds after every maturity in following way :
1.    What ever maturity amount you receive  after the period  , reinvest   a portion in fixed income plan to receive the equivalent fund after next maturity . In the previous example, Say you have got Rs 14.00 lakhs after 5 years .    Let us assume that bank interest would be at 9% pa then for 5 years period . Then invest Rs 9.00 lakhs as fixed deposit  out of Rs 14.00 lakhs for a period of 5 years to get maturity amount of Rs 14.00 lakhs .Â
2. Invest in equities the balance of Rs 5.00 Lakhs .
 This exercise you can go on repeating till you require your fund say for retirement .   You can build a long term wealth  by protecting your capital in every stage of your investment .Â
1.    What ever maturity amount you receive  after the period  , reinvest   a portion in fixed income plan to receive the equivalent fund after next maturity . In the previous example, Say you have got Rs 14.00 lakhs after 5 years .    Let us assume that bank interest would be at 9% pa then for 5 years period . Then invest Rs 9.00 lakhs as fixed deposit  out of Rs 14.00 lakhs for a period of 5 years to get maturity amount of Rs 14.00 lakhs .Â
2. Invest in equities the balance of Rs 5.00 Lakhs .
 This exercise you can go on repeating till you require your fund say for retirement .   You can build a long term wealth  by protecting your capital in every stage of your investment .Â
Capital Protected Hybrid funds for those who do not  have surplus FUNDS  for Investment.Â
If you don’t have any surplus investable funds now and still want to build your long term  wealth using Capital Protected Hybrid funds , an easy alternative way :
You  save a small surplus amount every month say Rs 10,000 every month .
If you are an income tax payee   and if you want to avail tax benefits , You invest  a portion of Rs 10,000   say Rs 6,500 in NSC or any other tax savings investmemnts . Otherwise invest in Bank deposits . Balance Rs 3,500 invest in SIP of equity based mutual funds .  Repeat the exercise every month . You will build your wealth  while protecting your savings .  Once you would have built sufficient capital for investment , you can try your investment in equities .
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Wish you   happy , long term , capital protected  investment  and let  your wealth grow  steadily .Â
You  save a small surplus amount every month say Rs 10,000 every month .
If you are an income tax payee   and if you want to avail tax benefits , You invest  a portion of Rs 10,000   say Rs 6,500 in NSC or any other tax savings investmemnts . Otherwise invest in Bank deposits . Balance Rs 3,500 invest in SIP of equity based mutual funds .  Repeat the exercise every month . You will build your wealth  while protecting your savings .  Once you would have built sufficient capital for investment , you can try your investment in equities .
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Wish you   happy , long term , capital protected  investment  and let  your wealth grow  steadily .Â
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DISCLAIMERÂ Â :
No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.
No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.