ING Vysya Bank has just closed subscription to a portfolio management scheme that aims to provide handsome returns through equity exposure while protecting investors’ capital. The main gainer would be ING and the distributors who push it

The stock markets are riding a wave of enthusiasm as the Sensex comes within touching distance of its previous record high. This is also the ideal time for portfolio management services (PMS) providers to capture the mood of the market and begin peddling a gamut of products to cash-heavy high net-worth individuals (HNIs). ING Vysya Bank has recently closed subscription to a Nifty-linked debenture scheme. This plan, issued through Milestone Capital Advisors Private Ltd, offers aggressive participation in the possible upside movement of the Nifty while claiming to protect the capital in case of downside. The way the product works is:

Up to 82% of the capital will be invested in NCDs of 36-month maturity, issued by Deutsche Investments India Private Ltd (these debentures have been rated AA+/Stable by CRISIL). This means that Rs82 will be invested in 3-year debt instruments, thus protecting capital of Rs100. The balance 18% will be invested in index derivatives, by taking trading exposure of 120% of upward Nifty movement. In doing so, the scheme claims the potential to generate upto 24% compounded return on the entire investment in the 3-year period, provided the Nifty rises by 90% in that period. However, if the Nifty rises by more than 90% at any time during this period, the investor is only eligible to the barrier coupon of 63%, translating into a compounded return of 16%. If the Nifty fails to appreciate during this period, the investor only receives the maturity value of the NCDs (provided the issuer does not default) and earns no returns on the equity side. As the appreciation in the Nifty closing level moves lower towards 100%, the potential for returns gradually diminishes.

As such, investors will have to take a blind bet on strong appreciation in the Nifty in the next three years to actually earn decent returns on their investment.
The product has other discrepancies as well. Since the equity exposure involves investments in futures and options contracts, it will involve charges on rollover of contracts and payment of margins. However, the product has not clarified the extent of incidence of such charges, which have the potential to erode returns.

The bank is apparently pushing the product quite aggressively. A certified financial planner Rajesh Joshi told us that he was offered a share in the commission (up to 3%) on the product. "These products are sold to HNIs who are looking for some excitement. They usually generate good money for the banks and distributors only, who can earn handsome commissions," Mr Joshi told Moneylife.