An Edelweiss Finance structured product, a capital protection scheme, has delivered a CAGR of 8.81% to investors since it was launched in February 2016. Compared to this, the Nifty rose by more than twice as much in the corresponding period – delivering a CAGR of about 20%.
The product in question offered a capital protection guarantee, but this came at a high cost to investors.This ‘Principal Protected Market Linked Redeemable Non-Convertible Debenture’ was launched by Edelweiss Finance on 26th February 2016.
What is a structured product?
A structured product is a complicated animal. It usually offers specific returns to investors if the Nifty hits specific levels. In return for this complex structure, some products such as this one, offer a capital guarantee – you cannot get back less than what you invested. Of course, the guarantee makes no allowance for inflation and hence in real terms, you can get back less than what you invested. Structured products (including this one) typically have a minimum ticket size of Rs 25 lakh and are marketed by wealth management arms of banks and other financial institutions, usually to High Net-worth Individuals (HNIs).
In this particular case, the structured product offered a capital guarantee, if the Nifty ended* below 85% of its level at the commencement of the product. In such a case, you would get your principal back.
If the Nifty rose but ended* less than 40% above its starting level, the product would give you a handsome return. This return would be governed by a complex formula multiplying the rise in the Nifty with a participation rate. The CAGR could go as high as 14.96%.
If the Nifty rose but ended* higher than 40% of its starting level, the product would give you a CAGR of 8.81%. This is what actually happened. The Nifty ended about 50% from its starting level and investors in the product got just 8.81%.
Those investing in just the Nifty Index through an index fund or ETF or in many actively managed mutual funds would have received much higher returns. The Nifty itself delivered a CAGR of about 20% over the duration of this structured product – 2 years and 3 months. Note however that these investments would not have any attached capital guarantee.
Holding the period for longer than 12 months results in a taxation of 10% of the gains made on the product. Unlike equity mutual funds, there is no grandfathering of gains made before 31st January 2018.
Short-term capital gains are taxed at slab rate (although there is some lack of clarity here). You can sell the fund on a stock exchange before maturity but liquidity for such types of products tends to be very low.
*The ‘ending value condition’ was triggered by actual Nifty levels on 28th December 2017; 25th Jan 2017 and 22nd Feb 2017. If the Nifty levels on either of these dates fell below or rose above the floor and ceiling mentioned above, the capital guarantee or capital ceiling returns would be triggered.