The Hindu Business Line : Benchmark Split Capital: Invest

Investors thinking of insuring their portfolios against further losses due to a stock market decline can consider investing a portion of their funds in the Class `A' units of Benchmark Split Capital Fund.

INVESTMENTS in Class `A' units of Benchmark Split Capital Fund can be considered. The fund is trading at a discount of about 16 per cent to its net asset value. Purchases made at this price assure a minimum return of 5.6 per cent per annum for about three years.

In addition, if the Nifty does rise, 40 per cent of the gains would accrue to the investor. For instance, if Nifty gains 15 per cent per annum, the annual returns will go up seven percentage points for investors purchasing Class `A' units at Rs 86.

Investors thinking of insuring their portfolios against further losses due to a stock market decline can consider investing a portion of their funds in these units. The hedge they obtain till the redemption of these units on August 16, 2008 is cost-free.

Investors who typically invest in fixed income instruments can also consider this scheme. The return of 5.6 per cent per annum, tax-free for a three-year term, is attractive. Plus, there is the potential for upside.

Background: Units of Split Capital Fund were allotted in August 2005. Split Capital Fund is a close-ended fund. The fund will mature for redemption in August 2008. Units are, however, listed in the National Stock Exchange and trade under the symbol, BSCFAUG08A.

On the date of allotment, the value of the Nifty was 2369.80. Investors in Class `A' units would get 40 per cent of the rise in the value of Nifty above this value. If Nifty declines, they would receive the par value of units, which is Rs 100.

The fund is expected to invest in a mix of equity and debt. The performance of the fund is, however, of no consequence to investors.

Risk of under-performance is borne by Class `B' unit-holders.

If Nifty closes below 2,369.80 on the date of redemption, money will be taken from Class `B' unit-holders in order to redeem `Class A' unit-holders at par value. Class `B' unit-holders are at least 20 per cent of issued capital. The protection for Class `A' units is, therefore, adequate.

With Nifty trading at about 2,535, the net asset value per unit of Class `A' units works out to 102.8. The units are however trading at a discount of 16 per cent at the NSE, offering investors an attractive entry point.

Downside: The downside in this investment is the prospect of a runaway rise in the Nifty. In such a scenario, investors would have been better off investing in an actively managed fund.

This is, however, not a risk because, typically, this investment is suitable only for those seeking a hedge and others who generally invest in fixed-income instruments.

A more relevant risk is the lack of liquidity. On many days, trading volumes are restricted to a few hundred units while only on a few days is it over a thousand.

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