Birla Sun Life Capital Protection Oriented Fund - Series 7 36 Months

Highlights

• Indian Investors prefer protective conventional debt investments over riskier ones such as equity
• In the long run however, equity as an asset class has historically given superior inflation adjusted returns
• Key question: Is it possible to offer high growth potential of equity while aiming for capital protection?
• Presenting Birla Sun Life Capital Protection Oriented Fund Series 7 (BSLCPOF- Series 7)
o Oriented towards protection of capital
o Seeks to participate in the upside of equity market through Call Options

Indian investors prefer capital protection over growth as per the KPMG-CII survey :

• For every thirty citizens in India, only one invests in equity market
• For every ` 100 saved in India, only 3 is invested in equity market
Internal estimates based on data sourced from: AMFI, World Bank, RBI, IRDA, NSDL & CDSL
“I want protective products with guaranteed income and good absolute returns”. That’s what Indian investors are looking for as per a survey done by KPMG-CII in 2009 on Indian mutual fund industry.

As visible in the graphs below, conventional savers in India prefer security and certainty of return. The certainty though comes at a cost...cost in terms of lower return that, on post inflation, post tax basis, could make savers poorer, rather than richer. On the other hand, equity has historically provided much higher real return (inflation and tax adjusted) over long investment horizons. But this return also has a cost… cost in terms of certainty of return, market risks and longer holding period.

Some mutual fund products offer a viable product blend that has capital protection orientation of debt and growth of equity!

For traditional savers who have never experienced mutual funds, this product could be a gateway to market linked investment-avenue. To offer investors an opportunity to participate in equity market along with the focus on capital protection, Birla Sun Life Mutual Fund launches the Birla Sun Life Capital Protection Oriented Fund – Series 7, close ended capital protection oriented scheme.

What is this scheme’s Investment Strategy?

This scheme seeks to provide capital appreciation linked to equity market with downside protection at the end of tenure:
• Scheme expects to achieve down side protection by investing in debt securities with tenure comparable with the tenure of the Plan,
subject to the credit risk.
• Scheme expects to achieve the market-linked appreciation (upside) by investing in premium of exchange traded Index options.
The scheme proposes to restrict its derivative exposure only to the extent of buying of call options of the Nifty Index. Hence the maximum loss would be restricted to the extent of premium paid, not any more. Moreover, the premium paid will be equal to or lower than the expected coupon receivable from fixed income securities after providing for fund expenses.

How do we orient the portfolio to provide Capital Protection?

The scheme expects to achieve capital protection by investing in AAA or equivalent rated debt securities with tenor comparable with the tenure of the Scheme. The selection of debt securities and investment norms are elaborated in the “Asset Allocation and Investment
Pattern” section of the SID.
Illustration: Assume an initial investment of ` 100 for 36 months. Assuming interest rate of similar tenure AAA rated papers as 9.20%, one would need to deploy about ` 78 in AAA rated instruments so that it grows to ` 100 at the end of 36 months, assuming no tenor mismatch between investments and the tenure of the scheme.
The remaining ` 16.75 (after providing ` 5.25 for expense for 36 months) can be used to buy call options which could provide market linked returns.
Interest Rates assumed are as per current expectations and may be vary at the time of deployment The actual allocation & performance would depend upon prevailing market conditions. Within the specified limits, the actual expense ratio could be higher or lower than the assumption above.

How does the scheme participate in equity market?

The scheme expects to achieve the market linked appreciation (upside) by investing in premium of exchange traded Index Call Options. By buying call options, we are purchasing the right to buy the Index at a ‘pre-defined price’ (also known as the strike price) at the level, after a pre-defined time (about 33 months for this product as the option will mature in June 2014). To buy call option, we have to pay a premium (cost for buying the right). Buying of a call option gives the buyer a right but no obligation to buy the Index at a future date. Hence,

• If market goes up, buyer has a right to buy the Index at a lower level and sell at the prevailing rate, thereby realizing profit.
• If market goes down, the buyer loses the premium paid. But the maximum loss for a buyer is the premium paid, even if the market (though theoretically) becomes zero.