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Benchmark Split Capital Fund


Benchmark, the AMC that specialises in ETFs (Exchange-Traded Funds) has launched a strange new fund that has some features that we are hard-pressed to understand the purpose of. The fund has two classes of investors, one of which can effectively be given money belonging to the other! A description of this fund follows.

Benchmark Mutual Fund is set to launch a closed-end balanced fund. Named as Benchmark Split Capital Fund, it will mature in three years, after which, it will be compulsorily redeemed.

The fund will offer two types of units- Class A (Preferred Units) and Class B (Capital Units). Both the units will be listed separately on the Capital Market Segment (CM) of the National Stock Exchange of India Ltd (NSE). During the initial subscription period, the units will be allotted at the face value (Rs 100 per unit) plus the applicable loads.

The fund would invest in the equity and debt instruments. Returns of the Class A unit holders will be contingent upon the returns of the Nifty. If the Nifty delivers positive returns, Class A investors' returns will be equal to 40 per cent of the returns of the Nifty on the date of maturity, while the rest would go to Class B investors.

However, in case the Nifty delivers negative returns during the period, then Class A investors will get back the face value, i.e. Rs 100 per unit. Whatever corpus will be left after redeeming Class A units will be given to Class B unit holders. This means that Class A investors will get a high degree of capital safety, since they will get less than the face value of Rs 100 per unit only when the total corpus (Class A + Class B) at the time of maturity is not sufficient to pay off the units of Class A alone at face value in full.

For example, if the Nifty is at 1,500 on the date of allotment and moves to 3,000 (i.e. 100 per cent gain) on the date of maturity, Class A unit holder would be entitled to 40 per cent of returns (i.e. 40 per cent of 100 per cent). Therefore, they stand to get Rs 140 per unit. If S&P CNX Nifty falls below 1,500 on the date of maturity, Class A unit holder would receive back the face value provided the total assets (Class A+Class B) are sufficient to pay the face value. Class B units will be redeemed from whatever assets are left after redeeming the Class A.

Illustration

Suppose the fund has total corpus of Rs 12,500, of which Rs 10,000 (i.e. 100 units) is invested in Class A and Rs 2,500 (i.e. 25 units) in Class B. Nifty is at 1,800 level on the date of allotment.

Let us see create scenarios to calculate the NAV for the Class A and Class B units at different points of time.


Note: Nifty Value and Total Corpus are assumed.

Broadly, this means that if the funds' returns are more than 40 per cent of the returns of the Nifty, then Class B unit holders will stand to gain more, and if the fund is not even able to generate returns equal to 40 per cent of the returns of the Nifty, then Class A investors will stand to gain more.

Initially, Class A units will be available for subscription from June 22 to July 14, 2005, while for Class B units, the initial subscription period will be from June 22 to July 19, 2005. Minimum number of units for which an investor can apply will be 50, and in multiples of 10 thereafter. The fund would charge an entry load of 2.25 per cent for application of 5,00,000 units or less. For application of a higher number of units, an entry load of 1 per cent will charged for Class A units, while there will not be any load for Class B units.

The fund will disclose its NAV on a weekly basis on every Wednesday. The fund will invest 30-70 per cent of its assets in equity and equity related instruments, 30-50 per cent in debt securities, and 0-30 per cent in money market instruments or government securities.