Edelweiss Finvest has announced a new structured product called Edelweiss Edge Multiplier, offering ‘higher participation’ if the market rallies. The product will offer a 150% participation if the market moves higher from the commencement dates. In this product, the ‘market’ is represented by the Motilal Oswal Large Cap Alpha Index, rather than the Sensex or Nifty. The product will have a tenure of 42 months from the date of commencement. Sources indicate that the product will close for subscription on 31st May 2018.
A structured product is typically aimed at ‘High Networth’ or HNI investors. These products are usually quite complex in design.
The Underlying Index
What’s different about this product is that it is not mounted on a conventional index like the Sensex and the Nifty. Edelweiss argues that these indices may not effectively capture ‘alpha’ or ‘outperformance’ in their returns, leaving investors with average returns. Hence, this product is mounted on the ‘Motilal Oswal Large Cap Alpha Index.’
As of 30th April 2018, the index comprised of 119 stocks (75% large cap and 25% mid cap). HDFC Bank accounted for 10.14%, Bajaj Finance 10.98% and Kotak Bank 10.82%. It had a lower allocation to energy stocks and a higher allocation to automobile stocks than the Nifty. It had no allocation to IT stocks, unlike the Nifty.
Although it is called an ‘index’ the Motilal Oswal Large Cap Alpha Index is actually linked to an actively managed portfolio. The portfolio will be managed by Mr Shrey Loonker and its daily values will be published on the Motilal Oswal website. IISL (an NSE company) will calculate the values of the index based on the performance of the portfolio.
The upside and the downside
The product will offer 150% participation on the upside. In other words, if the underlying index rallies by 100% over the tenure of the portfolio, you the investor will get a 150% return. Thus, in this scenario, you will get 2.5 times what you invested (principal (100%) + 150% return).
On the downside, the participation is 100%. In other words, if the underlying index falls to zero over the term of the portfolio, you will also get nothing back. If the index falls by 20%, you will also incur a 20% loss and only get 80% of your money back.
How performance is measured
The structured product like many others does not use a single ‘lump sum’ date. Instead, it takes the average of the index levels on three dates to calculate your entry price. To be precise, it averages out your trade or commencement date and the index levels one month and two months after this date. The exit price is also calculated in a similar fashion. An average of the index levels in the 34th, 35th and 36th month will be taken.
The structured product is formally called a ‘market-linked debenture.’ It has been rated AA by CRISIL and ICRA and AA+ by Brickwork. Please note that these ratings are not a sign of confidence in the market but merely a sign of confidence in the issuer’s ability to pay the amount due to you under this product on maturity.
This is a complex product meant for sophisticated investors. It works best for someone who is willing to take a high level of risk in return for a higher (150%) participation in the upside. The investor would also need to have a high level of confidence in the underlying index – the Motilal Oswal Large Cap Alpha Index.
You can look at our review of the performance of another Edelweiss Structured Product, here.