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Definition: Structured Funds
Structured funds are targeted for capital protection and capital appreciation i.e. the fund invests in both equities and fixed income securities. The fixed income securities component provides capital protection while the equities provide capital appreciation. A conservative structured fund may use up to 80% of the fund for investors’ capital protection and maintaining the performance of the portfolio. The remaining 20% may be used for stock index options, futures and derivatives for capital appreciation.
Investors, who would like to gain from the upbeat market yet wish to protect the majority of capital, invest in structured funds. Depending on the fund house, the ratio of capital appreciation and protection may vary, or a fund may be structured according to the needs and risk appetite of the investors.
Structured funds are taxable since any capital gains are liable to taxation. There are several risks associated with them such as credit risks on the assets within the fund, market risk such that the returns from the fund are zero or negative, inflation risk such that the returns from the fund fail to beat the inflation rate, term risk when the amount invested is pulled out before maturity, etc.
For example, if an investor invests 80% of the principal in capital protecting instruments while 20% in BSE/NSE stocks, there is only 20% risk. Depending on the situation in the market, the investor may gain from the market movement, but the investor will never see the fund losing more than 20% of the investment.