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Equity-Linked FMPs

Ranjan Karnad wants to know about equity-linked FMPs & the risks involved in such investment schemes

Birla Sun Life has recently come out with an Equity-linked FMP. Kindly tell me more about such FMPs and the risks involved in investing in such schemes.
—Ranjan Karnad

Birla Sun Life Mutual Fund is the second fund house after ICICI Prudential to come out with this new variant of FMPs: an Equity-linked FMP. An Equity-linked Fixed Maturity Plan is a debt fund which intends to invest primarily in the bonds issued by the corporate, banks, non-banking financial institutions, etc. These bonds are generally zero coupon bonds whose returns are set with the returns of underlying assets (e.g. group of stock or index) they choose. There is no fixed coupon rate, instead a participation ratio is fixed and on that ratio, the return is generated. The participation ratio is the fixed proportion of upside in the underlying asset that the investor is entitled to get. But here’s a catch, there is a cap on the upside known as knockout level. That is, if the value of the underlying asset reaches or exceeds a pre-determined level the investor will just get a fixed rate of return.

Birla Sun Life Mutual Fund is introducing two Equity-linked FMP schemes, Series-A (Aviator Plan) with maturity of 36 months and Series-B (Gladiator Plan) with maturity of 21 months. The participation ratio of Aviator & Gladiator Plans are 140-145 per cent and 97-100 per cent of the Nifty returns, respectively. Knockout levels of these two plans are 190 to 200 per cent and 140 to 145 per cent, respectively.

Pros and Cons of this fund:
This product is suitable for risk averse investors who would like to ride the market upside but do not like to participate in the downside. Equity-linked FMPs provide this very facility to investors. That is, if the underlying asset does not go up as expected, the investors would at least get their initial capital back. Thus the only risk associated with these is that there will be no capital appreciation.

On the downside, unlike conventional FMPs these types of schemes have an entry load or exit load. Entry loads on the Aviator and Gladiator Plan are 2.25 per cent and 1.50 per cent, respectively. An exit load of 2 per cent will be borne by the investors if redeemed within one year and 1 per cent if redeemed after 1 year but before the maturity date. While ICICI Prudential AMC's Equity Linked FMP does not have any entry load but has higher than average exit load of 5 per cent for redemption before maturity.

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