Although stock market experts and wealth managers are upbeat about the Indian stock markets for 2008, some of them also are advising their high net worth clients to start investing a portion of their investments in capital protection products. These wealth managers believe such products are likely to become more popular because the gap between equity and debt products will narrow in terms of returns this year.
Capital protection plans are either simple products, with the allocation of a substantial portion of their portfolio to high-quality debt, or structured products where investors can structure the pay-offs in several different ways.
“Capital protection products assure you upside with the downside protected,” says Sapna Narang, managing partner of Capital League, a Gurgaon-based private wealth management company. “In addition, better tax-free returns give capital protection plans an edge over fixed deposits.”
Not everyone buys that argument. “We don’t advise our clients to take up capital protection products because we can work out one on our own without bearing the annual expenses of such products that can be as high as 3% annually,” says Gaurav Mashruwala, a Mumbai-based wealth manager. “We prefer investing clients’ money directly in fixed deposits and provident funds with zero expenses.”
Structured products: Structured products are a subset of capital- protected investment products. The term “structured” is used because capital protection and the returns are provided through the structuring of different typesof derivatives.
Such products run on an algorithm, which ensures the protection of the capital on the maturity of the product. But they are largely for high net worth individuals with a ticket size of Rs20 lakh and a lock-in period of at least 15-39 months.
Recently, ICICI Prudential Asset Management Co. Ltd launched a fixed equity-linked fixed maturity plan for retail investors. The plan doesn’t have an entry load. There is, however, no capital protection guarantee for investors in the plan.
Popularity: In an effort to cash in on last year’s boom in the stock market, several companies launched Nifty-linked bonds—an instrument with a major allocation to debentures and a small part invested in derivatives.
“Although interest has been seen in such products, the amount invested is still very small compared with overall portfolio sizes,” says Capital League’s Narang. “Given the complexity involved in structured products, it is not easy for investors to figure out the suitability of such products on their own.”
Taxability: A back-of-the-book calculation shows that capital protection plans score over bank fixed deposits and bonds on the tax front.
While fixed deposits and bonds give post-tax returns of 5.64%, capital protection products give post-tax returns of 7.55%.
The difference arises because interest from fixed deposits is charged at the marginal rate of tax, 33% (highest tax slab plus surcharge), while protection plans are charged at 10% as long-term capital gains.