3 Reasons I Will Avoid Capital Protected Funds

Posted by Kris | Tuesday, October 11, 2011 | | 5 comments »

There no such thing as low risk but high return investments!! Except scams!
I bought this capital protected fund investing in commodities at the height of the 2008 bear market. I bought it because, i expected that the commodities will eventually rise with the recovery and also gold aka precious metal will rise as the dollar loses its value because of the quantitative easing by the FEDs. 

Below is the performance of my fund that I bought. I thought it will at least yield me 5% annualized returns. (Heck even my govt SUKUK yielded me 5% and no service charge!!) Commodities aka precious metals, palm oil were on the rise!! Heck this year alone, gold has risen like 20-30%!! And yet i still get fixed deposit returns.

3 Reasons why I will avoid capital protected fund in the future are:

1. I am bounded to stay vested in the fund for 3 long years!! If i withdraw or sell prematurely, i will get penalized around ~1% if i am not mistaken for the 1st year, and lesser amount as we reach the 3yr maturity. ~1% is alot considering that it only yielded 3% returns per year.

2. When the market recovers, this fund did not managed to capture the rise and hence the dismal performance. The main reason is that to do a capital protected fund, ~90-95% of the fund is invested in zero coupon bonds. (something like very low yielding fixed deposit. This is designed to protect the erosion of the value of money due to inflation. More detail from Wikipedia: zero-coupon bond (also called a discount bond or deep discount bond) is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity.[1]). So only the remaining ~5% is used to invest in commodities.  That is why the fund cannot performed good enough compared to equity type funds.

3. There is a 3.5% service fee when i buy into the fund. Ouch..with this low return, it really ate into my returns. I better put my money into fixed deposit or sukuk funds by the government. I expect more sukuk issuance as the economic condition worsens. Remember that government is too dependent on income taxes as a source of income. (around 41%). Lower wages, or higher unemployment will hurt their revenue.

P.S I am recalling the figures above by memory. (This was 3 years ago!!) But I think i am right to a certain extent. 

So my learning for 2011 is to AVOID Capital Protected Fund types NO MATTER what exciting sector it invests in. I will tell you next time what are the types that I like and will buy in the coming future when the market tanks. I was a mistake on my part even ( I think i could not find any pure commodity funds at that time) though I picked the correct sectorial play that is commodities.

Good thing is that the fund has matured, and I will withdraw my money from this under-performing fund (at least to my expectation) soon this month :)


Performance History
2011-09-30
Growth of $10,000 (MYR)
  •  Fund
  • -
  • 11.01
  • -0.04
  • 0.40
  •  +/-Cat
  • -
  • 1.60
  • 11.42
  • 0.45
  •  +/-Idx
  • -
  • -
  • -
  • -
Category: Capital Protected
Index:
  • Trailing Returns(%)
  • 2011-10-07
  • YTD Return
  • 0.12
  • 1 Year
  • 3.35
  • 3 Years Annualised
  • 3.14
  • 5 Years Annualised
  • -
Benchmarks
Fund Benchmark
Maybank 12-month Fixed Deposit Rate
Morningstar Benchmark



Key Stats
  • Morningstar Qualitative Rating™
  • Morningstar Category
  • Morningstar Rating™
  • Capital Protected
  • GIFS
  • -
  • ISIN
  • Inception Date
  • -
  • 2008-09-02
  • NAV(2011-10-07)
  • Day Change
  • MYR 1.03
  • 0.18%
  • Bid Price
  • Offer Price
  • -
  • -
  • Total Net Assets (Mil)
    (2011-09-30)
  • Total Expense Ratio
    (2010-10-31)
  • USD 4.86
  • 0.18 %
  • Front Load Fee(Max)
  • Redemption Fee
  • 3.50 %
  • 1.50 %
  • Employee Provident Fund
  • No


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5 comments

  1. LCF // 11:54 PM  

    Real good comments, I just read about this recently but you pretty much sum it up based on your own experience.

    Can you share what is the sukuk fund you mentioned here? The last time I heard, such funds by Public Bank are already closed for new entry?

  2. Jobless Girl // 9:32 AM  

    I think capital protected funds is best suit for retiree as its initial investment is protected by an insurance policy in case.

  3. Kris // 12:36 PM  

    @LCF,

    The sukuk fund is now closed for entry already. It is not from Public Bank. It is issued by the government.

    You can buy them from any major banks at that time. The last sukuk fund was like 2-3 years ago. The offering was huge.

    Here is my posting on Sukuk..

    Here is the link

    @Jobless girl, you are right here.
    I first bought into the fund thinking that the correct sectorial play will at least give me decent returns. But it turn out to be false T.T

  4. Unknown // 8:40 PM  

    Not all capital protected funds are scams? Your sub title is very misleading. Yes much of (if any) return can be absorbed by the high costs of providing the guarantee, but this is not the case with non-corrolated capital protected funds which are not stock market dependent for their return. I agree with your comments in general, but you cannot tar every concept with the same brush - that would be somewhat naive.

  5. Kris // 9:15 AM  

    @Unknown,

    I NEVER say that capital protected fund is a SCAM :P

    It just not my cup of tea because the return is so so low for such long long period.

    P.S I don't think my heading is misleading.