Capital protection or capital growth?

An investment journey typically start with the question – What is your purpose of investing? The answer may not necessarily be as simple as it may look at first glance. And this may require some soul searching. However, most of the answers to this question can probably lead to one of the following categories – need for capital protection and capital growth. So, what goal should you be chasing – capital protection or capital growth?


And there is a good reason to assume that more people would be interested in capital growth over capital protection.
However, when you chase capital growth, there is no assurance that you will always get what you chase. There is a certain risk associated with chasing capital growth. So your capital, while it may grow, is also at risk of getting depleted if your investment makes losses.
On the other hand, there is some risk, however small, even in chasing capital protection. That way, no one truly offers capital protection. A black swan event can happen any time.

What are the instruments which typically offer capital growth and capital protection?

(Note – There are no “official” categorizations as such. Below are based upon my understanding of what people usually invest in for a particular objective.)

Capital protection or capital growth?

Some investments offering potential for capital growth

  • Equities (Investing directly in stocks of select companies)
  • Equity oriented mutual funds
  • Real Estate (land, residential/ commercial properties)

I am not getting specifics for each of these asset classes, as it would be a different discussion.

(I have’t considered crypto currencies or derivatives, in case someone wants to consider it as an high-return investment. I don’t consider them as an investment & believe they are more driven by speculation)

Some investments offering capital protection

  • Bank (fixed) deposits
  • Tax saving instruments like PPF (Public Provident Fund), EPF (Employee Provident Fund, including voluntary contribution – VPF), etc.
  • Debt oriented mutual funds, including liquid funds. (There are risks associated e.g. risk of defaults/ interest rate movement) but usually the downside is low.
  • Gold/ Silver (Can be a part of both capital protection & capital growth by different people!)

An ideal investment mix consists of both capital protection and capital growth. The investment mix may vary according to your needs. Some people may have entire portfolio oriented towards capital protection, while some may have entire portfolio oriented towards capital growth.
As with most of the things in personal finance, this is more “personal” than “finance”.
Below are 3 key factors to consider while chasing what to pursue – capital protection or capital growth?

1. Investment objectives

Like I argued before, this is where your investment journey begins — identifying your investment objectives. And this can impact your asset allocation.

  • Do you have enough money and just want it to be safe? (if this is the case, will you risk being a bit adventurous?)
  • Are you aiming to be financial independent? (or partially financially independent?)
  • Do you want to plan for specific life goals? e.g. wedding, kids’ education, buying a house etc.
  • Are you looking at planning for retirement, and want your investments to provide inflation protected returns during retirement?

2. Risk appetite

If your risk appetite is moderate to high, you can chase primarily capital growth (likelihood of higher returns, but with downside risk). On the other hand, if your risk appetite is low, you may be better off following a capital protection driven approach (low risk, but potentially lower returns)

  • If your lose sleep over fluctuations in stock prices or stagnant apartment price, you may be better off following a low risk strategy.
  • Are you nearing a major life goal (e.g. child entering a college)? You may not want to exposed to a major stock market correction (which you are unlikely to predict anyway!)
  • If you are young, just started working, and OK with losing some money, but want a good shot of wealth creation, chasing capital growth may be suited for you.

3. Cash flow requirements

  • Do you require money in very near future? In this case, you may want to secure your money rather than being exposed to risk when you are close to needing it.
  • Are you nearing a major life goal (hence, requiring money in near future becoming important)? You can consider switching primarily from capital protection to capital growth mode.
  • Do you want your money to be liquid and easily accessible (and/ or being protected)? You may be better of choosing some investment where you can liquidate at a short notice.
  • If you want to be living rest of your life via passive income, you may be value certain degree of capital protection (with/ without capital growth in your scheme of things.

While equities have historically done well in long run (better than most asset classes), and will hopefully continue to do so in future, there is no guarantee that it will happen. However, due to sheer potential equities (and economy) offers in long run, it figures prominently in the asset allocation among people seeking capital growth.
But where there is potential for growth, there is a risk too!
The answer to what you should primarily be chasing and at what mix- capital protection or capital growth is very contextual and specific to your life situation and goals. And this will dictate your asset allocation.
Like many other things in life, there may be no right or wrong answers here!


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