« Top Headlines » Open DEMAT Account in 24 hrs  ITR Filing: 6 Ways to Get Exemption on Income Tax  Income Tax Return Filing: 10 Mistakes To Avoid When Filing ITR For AY 2024-25  Old vs New Tax Regime: Who should move to the New Tax Regime from the old one?  Income Tax Calculator FY 2023-24: How To Know Your Tax Liability Online On IT Dept's Portal?  BackBack Income Tax Act amendment on cards on tax treatment of MSME dues  ITR-1, ITR-2, ITR-4 forms for FY 2023-24 available for e-filing. Check details here  Income tax slabs FY 2024-25: Experts share these 8 benefits for taxpayers in new income tax regime  How To File ITR Online - Step by Step Guide to Efile Income Tax Return, FY 2023-24 (AY 2024-25)  Old or new tax regime for TDS on salary? This post-election 2024 event will impact your tax planning  What Are 5 Heads Of Income Tax?  Income Tax Dept releases interim action plan for FY25 on tax collection, refund approvals «  Ensuring `faithful representation' in financial reports... When does private turn public?... » Guarantee on capital, not returns August, 31st 2006 It is curious that Capital Protection Oriented Schemes have been singled out for prohibition against promising a guaranteed return as well. The Securities and Exchange Board of India (SEBI) has come out with a circular dated August 14, 2006, to all registered mutual funds asking them to state clearly in their offer documents relating to Capital Protection Oriented Schemes (CPOS) as well as in the Key Information Memorandum (KIM) and advertisements relating to such schemes that what is protected is the capital and that no guaranteed return is offered. The way the exhortation is worded it would appear that the two cannot go hand-in-hand a scheme that offers capital protection cannot in addition offer guaranteed returns and vice-versa. The SEBI Regulations do not frown upon guaranteed return schemes so long as the promise is made by the sponsor or the Asset Management Company (AMC). In the event, it is curious that CPOS have been singled out for prohibition against promising a guaranteed return as well. Why should the two objectives be perceived to be mutually exclusive? The circular wants such schemes to drive home the message that capital protection is ensured not through guarantees, insurance cover, etc., but by the very nature of the structure of the investment portfolio of the scheme. That such schemes are not proscribed from investing in equity is abundantly clear from the line contained in the circular, which reads: "Further, it should also be ensured that the debt component of the portfolio structure has the highest investment grade rating." Portfolio structure How can a scheme guarantee return of capital intact when it is allowed to flirt in equity investment which by its very nature is theoretically capable of melting away completely. Even a partial meltdown can spell trouble for the scheme when the time for redemption arrives. In the event, to ensure that CPOS live up to their promise, the sponsors or the AMC should also have been mandated to stand guard instead of merely relying on the structure of the portfolio of the scheme. That CPOS can only be close-ended schemes susceptible to redemption pressures must be noted in this regard. Coming to the issue of returns, it is a trifle curious that SEBI believes that investors in mutual funds would be more worried about safety of capital rather than about returns. If safety of capital were the only counter, wise investors would rather keep their money under their mattresses! And contrariwise, if the return on investment were the only worry, they would have plumped for a pure income scheme, thus steering clear of trouble. SEBI should, therefore, revisit the entire issue of guarantees dispassionately to make the idea workable and meaningful. If the idea of CPOS is to lure investors to balanced schemes with a sizeable equity component, then the sponsor or the AMC must be allowed to give both the guarantees. S. Murlidharan (The author is a Delhi-based chartered accountant.)