The Fixed Maturity Plan û Series 33 is linked to the National Stock ExchangeÆs Nifty index, which comprises 50 leading stocks traded on the exchange, and is the first fixed-maturity fund to provide exposure to equity markets.
The idea is to provide the low risk of a typical fixed income-style product, but with the juiced-up returns that equity investors want. In the long run investors are probably better off buying the index directly, but, with a three-year maturity and downside protection, this product is aimed at investors who are dabbling in stocks for the first time û an attempt to tease Indian savings away from gold and property.
The NiftyÆs history suggests why nervous investors might worry. Looking back at hypothetical three-year investments in the index since its launch in July 1990 shows that one-in-four ended with negative returns. The potential upside, however, helps to balance those fears û when the three-year period ended in positive territory it averaged a 17.4% yearly rate of return.
Corporate earnings are forecast to grow at up to 20%, which should mean that even a US economic slowdown will not be catastrophic for Indian companiesÆ profits û particularly as the economy does not rely heavily on exports. Falling interest rates also help to make equities more attractive and some big-ticket offerings scheduled for 2008 could also attract more local investors to the market, which should create greater stability. Reliance Power has already completed a record IPO and UTI, State Bank of India and Oil India are all slated to issue new shares as well.
Downside risks do exist, say analysts. Most worry about the effect of a possible recession in the US, although the January rate cuts have tempered these fears and are generally thought to be positive for emerging markets. A populist budget could be expensive and hinder the governmentÆs attempts to solve its finances, threatening another sovereign downgrade that would be bad news for the market in general.
Back-tested data for the fundÆs performance, using the indexÆs full 17-year history, shows how the strategy offers the opportunity to capitalise if the bullish view prevails, but also protects against a bearish outcome. During bull markets since 1990 the fund did a good job of tracking the Nifty û for three-year periods when the index has returned between 15% and 25% a year, the fund has averaged 19.5% compared to 19.9% for the index. And when Nifty has given negative returns the fund has never given negative returns û for funds that closed during the bearish three-year period starting in May 2004, the indexÆs worst loss was 16.4%, compared to a 1% gain for the fund.
The indicative coupon is calculated based on the initial value (the average of the Nifty value at the start of the first three months) against the closing value (the average of the Nifty value at the end of the last three months). The maximum upside is capped at 200% of the start level.
To achieve the equity upside the fund is invested mostly in equity-linked notes. Up to 80% can be invested in these products, but the manager says that it expects to limit the allocation to 65%. The manager is restricted to investing no more than 50% in derivatives or securitised debt. Although the product aims to deliver at least 100% at maturity, there is no assurance that investors will get all of their capital back.
The minimum investment amount is just Rs5,000 ($127) and there is a 5% fee for early redemption. Investors can sell the fund through a repurchase facility provided at six-monthly intervals.
This story was initially published in the February issue of FinanceAsia magazine.
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