Protect Capital increase returns

Whenever we invest, we want to play safe. We would like to have big returns but would not like to lose the capital. But as it is said, low risk low return. So what should you do if you want good returns with low risks or no risks?

Some investment options are Bank Fixed Deposits, Company Deposits, Fixed Maturity plans, Mutual fund based Monthly Income plans, post office Monthly Income scheme, etc.

Do all of them guarantee return of capital or just try to protect capital. Most of them just try to protect capital other than Bank Fixed Deposits and Post Office Monthly Income Scheme which guarantee return of capital.

Let’s assume that you invest in a mutual fund which promises protection of capital. What does the mutual fund do? It invests your capital in such a way that your will be intact on maturity date. How is it done? If you invest Rs.1000/- in a 5 year mutual fund which promises to protect your money, the mutual fund will invest your capital in such a way that they will get Rs.1000/- at the end of 5 years.

How? If a government bond is giving a return of 7.5% compounded yearly for 5 years, the mutual fund will invest Rs.700/- in the government bond and the balance in Equity, which will help increase the return.

So can you also replicate what the Mutual Funds do? Yes. As we had stated earlier, high risk high return. So we will first protect our capital. We will invest the whole amount in Post Office monthly income scheme. So every month we will get some return. This return we will use to deposit in a good equity fund through SIP (Systematic Investment Plan). 

Why SIP? By SIP you are investing regularly over a period of time taking advantage of the up’s and downs of the market price (NAV – Net Asset Value, since mutual funds are purchased at NAV). Basically averaging the cost of purchase, so you get the best price over a period of time, also you are compounding your investment.

By following this process you do not have to regularly keep track of your investment and you would be your own boss. Since you decide the fund in which you would like to invest. Another option would be to take yearly SIP in different funds i.e. this year in one fund next year another depending on how the mutual fund is doing. This way we take decisions based on the current market situation as well as diversify our risks and last but not the least, our capital is intact.