The Hindu Business Line : ICICI Pru S.M.A.R.T Fund

ICICI Pru Structured Methodology Aiming at Returns over Tenure (S.M.A.R.T) is a close-ended debt fund that seeks to provide investors with equity market linked returns while aiming to protect against downside. The fund will invest up to 95 per cent in equity-linked debentures with returns linked to the movement of the Nifty.

It will also invest 0-100 per cent in investment grade debt securities . It is important to note that this fund is not a capital protection scheme and does not offer any guaranteed/assured interest or repayment of principal as the investments are subject to credit risk. However, the fund plans to invest in quality debt securities to minimise this risk.

Methodology: In order to achieve equity-linked returns the fund would invest in debentures issued by a third party/parties which provide an indicative coupon rate. The coupon would also be linked to an index – Nifty in this case, to participate in the returns arising from stocks. Such returns, linked to the index, would come with a cap.

The coupon is also designed in such a manner that even in case of a decline in the index, the capital plus an indicative yield would still be generated. Effectively, the fund seeks to provide limited upside on a stock market rally, while preventing loss of capital on declines.

The returns from the above together with other debt securities would add up to the total pay-off for investors.

Investment strategy for 24-month plan

This option plans to invest in coupons that offer an indicative absolute return of 15-16 per cent (7.7 per cent compounded annually) if the investor remains invested till maturity. This option would have a knock-out barrier of 145 per cent of the initial Nifty level.

In other words, if the Nifty managed to reach this level at any time during the tenure of the fund, then the investor would receive an absolute return of 19.5-20.5 per cent on maturity. Thus, irrespective of the direction in which the Nifty moves, investors’ returns would be locked, on achieving the knock out barrier. If the knock-out barrier is not reached anytime during the tenure of the fund, then the fund would calculate the returns of the fund from the initial level. Investors would receive such returns or the indicative yield whichever is higher.

Note that such returns would be proportionate to the amount invested in equity linked debentures. In either case, the minimum return would be at 7.7 per cent and the maximum would be the returns achieved on knockout – 45 per cent absolute returns (or 20 per cent compounded annually), for the tenure of 2 years.

Investment strategy for 36-month plan

The 36-month plan is similar to the above except that there is no knock-out barrier. Instead the payoff is restricted to 160 per cent of the initial level and the indicative yield is 18-19 per cent. Thus the minimum return for the investor would be the indicative yield (5.9 per cent annualised) or 60 per cent absolute (16.7 per cent annualised) depending on the gains in the Nifty.

Pros and cons: The scheme is an attempt to offer structured products, hitherto available only to high net worth investors, to retail investors. The structure of the product may not be easy to understand for a lay investor. Further, in a rallying market, the upside offered by equities may be superior even if investors were to opt for balanced mutual funds.

It can be argued that the fund seeks to protect downside risks and offer safety of capital. But the indicative yield and period of lock-in makes it a less attractive option when compared to pure debt instruments available now. Investors may find it easier to achieve a balanced portfolio through an appropriate allocation between equities and debt.

Exit option: Investors can exit the fund during the interval period – which opens up once in every six months, subject to exit load. On taxation, the fund would be subject to long term capital gains tax as it assumes the role of a debt fund.

The fund will be managed by Mr Chaitanya Pande . The new fund offer closes on September 19.

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