Capital Protection in Equity!

Today, everyone is surprised at the up move in the Equity market. However, let’s go into a flashback.

First, the markets tanked to almost sub-16000 levels in May 2013. This was because of the CAD rising, high inflation persisting and low growth. Then, the rupee went into a tailspin, Bond yields skyrocketed after 15th July 2013 and there was gloom and doom all over!

After the gloom, came Raghuram Rajan-he almost single handedly propelled the market from 17000 odd levels to 20000 levels. After yo-yoing around 20000, the markets surged to 21000. Reason? State election results in December 2013 throwing up prospects of the BJP getting a majority in the upcoming elections. And most of the Domestic Investors who were caught in the Tsunami of 2008 redeemed, vowing to re-enter at a lower level, which most expected at that time! The lower level did not come, because the FIIs started buying. But why are FIIs buying, while domestic investors are selling? While domestic investors look at the rear view mirror before investing, the FIIs look at the road ahead.

Secondly, look at it this way-US , Europe and Japan have started recovering – yet US is growing at 2.5%, Europe at 1.5-2% and Japan at 1%. While in the midst of a recession, India continues to grow at 4.5%! And any smart investor is bound to choose return, which in India’s case, could only improve from here on. For those wondering what happens on the political scene, remember, whichever political party forms the government, economic compulsions WILL lead to higher growth.

What about the Domestic investors who are waiting? “Time and Tide wait for no Man” said an old proverb. “Time and Stock markets wait for no Man” is the new proverb! However, why believe that this is the end? This is just the beginning. Even then, if you are worried about the uncertainty and ensuing volatility, here’s something to chew on.

capital protection in equity

How about getting Capital Protection despite investing in Equity? Crazy-you may say! What? How?

Read on……

I invest 10 Lacs in a Liquid Mutual Fund (most of us would have that kind of money stashed in a Bank Account or Short Term FD-just in case). Suppose the Liquid Mutual Fund gives a return of 7.5-8% (Last year, most liquid mutual funds gave close to 9% returns, but past returns may not be an indicator of the future). This return gets accrued on a daily basis. So, if there are 300 working days, and liquid fund gives 7.5%, everyday , the NAV would appreciate by approx.0.025% or Rs 250 per day on an investment of Rs 10 lacs – theoretically. Now, suppose I instruct a CASTP or Capital Appreciation Systematic Transfer Plan into Equity. Then, on a daily basis Rs 250 gets invested into an Equity Fund. This would ensure that:

  • Daily Volatility of Equity is averaged out.
  • Original Capital of 10 lacs remains intact, because only the Capital Appreciation is being transferred to equity

At the end of the year, I would still have Rs 75000 invested in Equity – which could appreciate or diminish according to market conditions but the capital is as it is! Hua naa Capital Protection with Equity Returns! For those worried about Short Term Capital Gains tax, you can opt for a daily dividend Payout option and Transfer the dividend into Equity –here however, a dividend distribution tax of 25% would apply. This would reduce the Liquid Fund Returns to 6% and daily Equity Investment to Rs 200.

Happy innovative investing!

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