In a first for India, a capital guarantee fund

It should be mentioned that this is a defined benefit product, as opposed to an assured return product. In the former, the final return depends on a formula and is not any guaranteed rate of return. The only thing guaranteed is the return on principle.

The product may look complicated at first glance, but the features it offers make it worth the effort to look at it for a certain category of investors.

A three-year closed-end scheme (investors should ideally invest for three years and not withdraw in the interim), this has units divided into two parts Class A and B — just as a share offering has a preference share component and ordinary shares. As preference shares get a predefined return and get the first right over dividend payouts, similarly Class A units are the ‘preference’ units and Class B are the ordinary ones.

The product is designed such that the retail market will buy into Class A and the institutional market will buy into Class B.

A Class A investor will get a guarantee on his principle and get 40 per cent of the rise in the Nifty.

For example, an investment of Rs 1 lakh will get back Rs 1 lakh, if the Nifty falls or stays flat. Now suppose the Nifty goes up by 20 per cent in three years, the investors make just 8 per cent over this time period. If the market goes up by 60 per cent, they make 24 per cent over three years.

Returns for Class A begin to look exciting when the Nifty sees rates of growth higher than this. Suppose the Nifty doubles over the next three years, Class A gets a return of 40 per cent over three years and so on.

Class A investors pay an upfront load of 2.25 per cent, which means that out of an investment of Rs 1 lakh, Rs 2,250 is deducted as distribution costs, the rest goes to work in the debt and equity markets.

At the end of three years, there’s a long-term capital gain of 10 per cent since this is a predominately debt product.

So a profit of Rs 240, will mean a tax of Rs 24.