CRISIL has assigned the first ratings on capital protection-oriented funds in India, following the guidelines recently issued by the Securities and Exchange Board of India (SEBI) on such funds.

CRISIL has assigned the provisional ‘AAA(so)’ ratings to Franklin Templeton Capital Protection Fund’s three-year and five-year plans; these are schemes proposed to be launched by Franklin Templeton Asset Management (India) Private Limited (FTAMC), the investment manager for Franklin Templeton Mutual Fund. The assigned ratings indicate the highest degree of certainty regarding timely payment of the face value of the units to unit holders on maturity of the schemes. The ratings reflect the significant degree of capital protection expected to be available to investors due to the high proportion of debt in the portfolio, and the fact that the scheme’s debt investments will be confined to high quality debt securities such as government securities (G-Secs) and instruments rated ‘AAA’ by CRISIL, thus mitigating default risk. The ratings are not a comment on the schemes’ net asset value (NAV) in relation to their face value at any time before their redemption.

According to Mr. Arun Panicker, Director, Financial Sector Ratings, CRISIL, “Capital protection-oriented funds offer a platform to risk-averse investors who would like to participate in an upturn in the equity markets, but at the same time not suffer an erosion in the invested amount.” In simple capital protection-oriented funds, such as these, capital protection is ensured by having a substantial portion of the funds’ corpus invested in high-quality debt at all points in time. The debt component is sized such that the future value at the time of redemption will be equal to or greater than the initially-invested amount. In sizing the debt corpus, CRISIL has factored in the default risk of debt securities, reinvestment risk of interim cash flows, and tenor risk arising on account of inability to fully invest the fund’s corpus for the same time frame as the tenure of the fund.

The remainder of the scheme’s corpus is invested in equity markets, and investors can benefit from any appreciation in equity value. At the same time, if equity markets decline, on account of the portfolio structure, investors would not be expected to suffer loss of capital on maturity.

FTAMC has furnished a set of warranties to CRISIL, including a commitment to invest the debt component of the scheme only in G-Secs and securities rated ’AAA’ by CRISIL. FTAMC will also furnish the regulatory clearance for the scheme, and the final offer document. CRISIL will assign the final ratings to the scheme on receipt of these documents.

About the asset management company
Incorporated in 1996, FTAMC is sponsored by Templeton International Inc. Templeton International Inc is a wholly-owned subsidiary of Templeton Worldwide Inc., which, in turn, is a wholly-owned subsidiary of Franklin Resources Inc. As on July 31, 2006, FTAMC had 45 schemes under management, with a corpus of Rs.228.71 billion.