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IPO |
June 22-July 14, 2005 |
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Type |
close-ended, balanced |
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Initial offer price |
Rs 100 |
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Entry load |
For applications upto 5 lakh units - 2.25%; above 5 lakh units -1% for Class A and
nil for Class B |
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Exit load |
Nil |
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Min. investment
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Rs 5,000 plus applicable load Liquidity |
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Listing |
NSE |
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| Though subscription is open for both classes of units, Benchmark already has the approval of institutional investors for subscription to Class B units.
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| Also, the fund is structured in a way that there can be only one Class B unit for every four Class A units. It's the Class A units that are being marketed to retail investors.
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Class A/preferred units
The USP of Class A units is that while their capital is guaranteed, they also offer an upside from the equity markets. Also, at the time of payout, Class A unit holders would get preference over Class B unit holders in case of a shortfall.
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| These units have been rated AAA (Ind)(SO) by Fitch, which is the highest rating for structured products.
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| In the case of Benchmark's Split Capital Fund, the structure is such that even if the equity portion of the fund's portfolio reduces to nil at the end of three years, the debt portion of the portfolio would be enough to guarantee the capital of Class A units.
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| For instance, if there's Rs 100 worth investment in Class A units, there would be an additional investment of Rs 25 in the form of Class B units (in the ratio of 4:1), which makes the size of the portfolio Rs 125. Thirty-two per cent of this or Rs 40 will be invested in equity, while the balance Rs 85 will be parked in three-year debt.
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| The current yield on three-year paper is about 6 per cent, which means that the debt portfolio will be worth Rs 101.2 at the end of three years.
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| So, even if the equity portion turns to nil at the end of three years, the debt portfolio would be sufficient to redeem the Rs 100 worth capital of Class A units.
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| Of course, this is based on the assumption that there are no defaults on any of the investments in the debt portfolio, which is unlikely given that investments will be either in government paper or AAA-rated bonds.
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While the debt portfolio will take care of the capital, returns would solely depend on how the equity market performs in the three-year period.
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Redemption value of Rs 100 invested in Split Capital Fund | |
Gain in 3 yrs
Nifty/Sensex (%) levels |
Sensex then* |
Nifty
then |
Class A
(Rs) |
Class B
(Rs) | |
-100 |
0 |
0 |
100 |
4.95 | |
-60 |
2860 |
878 |
100 |
68.95 | |
-40 |
4290 |
1317 |
100 |
100.95 | |
0 |
7150 |
2195 |
100 |
164.95 | |
50 |
10725 |
3292 |
120 |
164.95 | |
100 |
14300 |
4390 |
140 |
164.95 | |
160 |
18590 |
5707 |
164 |
164.95 | |
200 |
21450 |
6585 |
180 |
164.95 | |
* Returns would depend on how the Nifty moves. Sensex levels are given for reference. |
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| Benchmark has defined the return for Class A unit holders at 40 per cent of the return of the Nifty in the three-year period. Thus, if the Nifty rises by 100 per cent, the return of Class A unit holders would be 40 per cent. In order to beat the 19 per cent cumulative return from three-year bonds or bank deposits, the markets would have to rise by about 50 per cent.
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| In other words, the Nifty would have to be around 3290 or the Sensex would be around 10725 three years from now for an investment in Class A units to make more sense than, say, one in a three-year bond or an FD. These calculations ignore the impact of entry load and tax implications.
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Class B/capital units
Class B unit holders have almost the opposite risk-return profile. Their capital is not guaranteed, and if the value of the equity portion of the portfolio were to turn to nil, this class of investors would lose all their capital.
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| But let's be realistic - an index of blue-chip stocks can not be expected to turn to nil. So Class B unit holders can't be expected to lose all their capital. In fact, they start losing capital only when the Nifty falls by more than 40 per cent in the three year period.
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| In other words, only if the Nifty's at 1320 three years from now (it's currently at 2195) or the Sensex falls below the 4300 levels (from 7150 currently) will Class B unit holders lose any of their capital. Simply put, their downside, too, is pretty well protected.
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| As far as returns go, they are capped at 64.95 per cent or 18.15 per cent on an annualised basis, as long as the Nifty is flat or in positive territory. If the Nifty falls, returns for Class B unit holders would be lower to that extent (see table).
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| The risk-return profile of Class B investors seems better, but the catch is that there can only be one Class B unit for every four Class A units, which means that allotment would be restricted for Class B units. |
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