Mar 20, 2008

ICICI Pru Equity Linked FMP (Series 33 Plan A) - Analysis

ICICI Pru Equity Linked FMP (Series 33 Plan A): Promise of equity

ICICI Pru FMP Series 33 is a three-year closed-end fund that uses equity-linked debentures to deliver returns. The fund charges no entry load and will levy a 5 per cent load for redemptions made during the repurchase windows.

Investment proposition: Investors who would like to participate in the upside potential of the equity market without significant risk to their capital, currently have two broad options to choose from.

One, closed-end capital protection funds from MFs which invest mainly in debt with a small equity allocation; these are designed to provide 'debt-plus' kind of returns.

Second, portfolio management schemes in this genre which use dynamic asset allocation to deliver capital protection. The returns in this case depend on the timing and methodology of the switches between debt and equity. ICICI Prudential's FMP Series 33, in contrast, offers investors a chance to get almost the complete appreciation potential of equities, while assuring return of capital.

Assuming the Nifty index gains 50 per cent over the three-year tenure of the scheme, an investment of Rs 100 in the fund will earn absolute returns that are quite close to the market return of 50 per cent. If the Nifty is flat or below starting levels at the end of the three-year period, investors may only get back Rs 100 at the end of the term.

To avoid risks associated with timing of the launch, the average Nifty levels for the first 90 days and the last 90 days of the fund's tenure will be used to compute 'market' returns that investors earn.

Portfolio strategy: The ICICI Pru Equity Linked FMP plans to achieve the above objective by investing 80 per cent of its assets in equity linked debentures issued by established banks and third party issuers. These issuers, to be of high credit quality, will offer returns linked to the Nifty's performance over the fund's three-year tenure. Twenty per cent of the assets will be invested in AA-rated debentures; returns from this source will mainly fund fees/expenses incurred in the scheme.

Pros and cons: The fund is suitable for investors who are not clear about stock market direction over the next three years; yet would like to participate in its upside potential, if any. Should the stock market stay flat or dip during the fund's tenure, the fund will not offer any returns; only capital may be returned.

Thus, investors in this fund have to weigh the cost of opportunity foregone, in the event of the stock market not performing to expectations. Debt options such as FDs or long-term bond funds may deliver a reasonable return over this period. This fund is not a capital protection-oriented fund, akin to the ones already launched, and the portfolio is not rated for its ability to protect capital by agencies such as Crisil.

The portfolio will carry a credit risk, linked to the issuers of the equity-linked debentures. Investors confident that the stock market will be significantly higher at the end of three years can, in any case, capitalise on this return potential through diversified equity funds, where you can time your entry.