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Overview
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Capital Preservation Portfolio System
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Very often the fear of undefined downside risk prevents many investors to either
stay away from risky asset classes like equity completely or have sub optimal allocation
to them. If there was a way to define the downside, many investors would find it
comfortable to increase their allocation to equity to an optimal level.
Various methods have been adopted to contain the downside to a desired level. The
most common methods are Stop Loss, Purchase of protective put and Option Replication
or CPPI (Constant proportion Portfolio Insurance).
Stop Loss is the most simple and most commonly used method. However, it is unscientific
and based on the gut feel. Purchase of a protective put option is a very sound and
watertight strategy but often the put option is not available for a longer duration.
Buying series of short term put options may increase cost. In such a scenario option
replication or CPPI becomes the best option to define and contain the downside risk
of a portfolio and at the same time have significant upside exposure.
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Concept
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CaPPS is a PMS scheme based on a quantitative model. The main objective of the model
is to have a defined downside and unlimited upside based on performance of the underlying
portfolio. To achieve such a pay off structure, the model uses principal of option
replication by dynamically hedging a portfolio based on CPPI model. In laymen's
term when the value of underlying asset rises the allocation to equity rises and
vice versa.
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Underlying investments
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Exposure in underlying equity will replicate index. The index exposure will be taken
through Basket of equity shares, futures, ETFs or combination of three.
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Multiple options
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The investors can select floor levels of either 90% or 80% of principal and they
can also select automatic rebasing of floor at every 10% rise in NAV.
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Upside participation
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Upside participation ratio will broadly depend on the protection level selected.
More aggressive investor i.e. those who have chosen an 80% preservation level will
have higher participation and one with 90% preservation level will have lower participation.
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What are the risks ?
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The level of preservation is not a guarantee.
The actual NAV may be less than the defined floor in certain circumstances especially
if market opens with gap between two trading sessions or liquidity of the underlying
dries up.
The upside participation will be less than 100% The upside participation in equity
may be less than 100% due to cushion maintenance for downside protection. Higher
the floor, normally lower the participation.
The NAV may not rebound with market in same proportion after a severe correction.
After severe correction the portfolio goes into cash to preserve NAV at the defined
floor level. This would result into extra cushion not being available for additional
equity investment and hence there will be negligible upside participation.
If the floor is hit, the portfolio will become 100% Cash.
The chart demonstrates how the model reduces equity exposure when the market goes
up and increases equity exposure when the market comes down.
Nifty STraP, due to its dynamic nature can serve as an ideal tool for tactical asset
allocation.
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Max. Returns
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There is no cap on maximum returns.
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Min. Investments
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Rs. 25 Lakhs
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Fees
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2.5% per annum plus applicable service tax (Fees will be charged quarterly in advance)
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Load
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0.5% upfront for inv. less than Rs. 1 crore
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Daily
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NAV and holdings on request
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Monthly
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Comprehensive statement
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Annual
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Audited annual report for the account
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RISK FACTORS
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1.
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RISK FACTORS Securities investments are subject to market risks and there can be
no assurance or guarantee that the objective of any of the PMS Scheme will be achieved.
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2.
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As with any investment in securities, the Net Asset Value (NAV) of the portfolio
under the Portfolio Management Scheme can go up or down depending on the factors
and forces affecting the capital market.
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3.
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Past performance of the Portfolio Manager does not indicate the future performance
of the same scheme in future or any other scheme(s) of the Portfolio Manager.
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4.
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CaPPS is only the name of the Portfolio Management Scheme and does not in any manner
indicate either the quality of the scheme or its future prospects and returns. Client
is therefore urged to study the Disclosure Document carefully and consult their
Investment Advisor, if any, before they enter into Portfolio Management Agreement.
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5.
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The Portfolio Manager is not responsible or liable for any loss or shortfall resulting
from the operation of the Scheme.
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6.
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Investors in the Scheme are not being offered any guaranteed or assured returns.
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7.
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Because of halt of trading in market the portfolio may not be able to achieve the
stated objective.
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