If you are looking to participate in the stock market but don’t want its downside risk, then you should consider equity-linked fixed maturity plans (FMPs). With negative news like the global slowdown and soaring inflation making the headlines almost everyday, the market is unlikely to rebound in a hurry. Yet, if the global cues turn positive quickly (recall the sharp pullback in the dollar and the subsequent decline in gold prices), investors might miss a chance to buy cheap in this market. Equity-linked debentures ensure that you are not left ruing such missed opportunities.
Fund houses Prudential ICICI and Birla Sun Life are offering equity linked FMPs with attractive features, like definite returns. Prudential ICICI’s SMART FMP series will invest up to 95 per cent of its corpus in equity-linked debentures. The debentures are benchmarked to Nifty’s performance.
Prudential ICICI AMC is offering a minimum return, irrespective of market performance, which is good news for investors. Even if the Nifty’s performance is below par, Prudential ICICI will give a minimum pre-tax yield of 15-16 per cent (absolute returns) over 24 months and an 18-19 per cent return on its 36-month plan. These returns could be higher, if the market improves. Besides, investors can participate in the Nifty’s performance in case the market rebounds.
Both these plans come with a knock-out level, beyond which the Nifty’s returns are capped. On the other hand, Birla Sun Life provides a 60 per cent participation in the market in its three-year plan, and a 45 per cent upside in its 21-month plan. This means that if the Nifty appreciates by 1,000 points, the investor gets returns equivalent to 600 points.
For investors, it’s a good way to hedge their entry into the stock market. But there are drawbacks. Says Nilesh Shah, Deputy Managing Director, Prudential ICICI AMC: “The product is less liquid because there are not too many buyers for equity-linked debentures. Therefore, this spells a high exit load before maturity.”
The returns are, however, quoted on an absolute basis. In simple interest terms, the assured returns work out to around 6.2 per cent in Prudential ICICI’s schemes, and around 8 per cent per annum for Birla Sun Life’s products, much less than regular FMP returns of 10-11 per cent. Says Shah: “The minimum yield is an attempt to woo wary investors to an indirect equity route.” For many equity investors still sitting on the fence, it’s a win-win opportunity.