How good is Reliance Capital's Equity Linked Debentures, Series B-57 ?
If you are an HDFC Bank customer, you may have been approached to buy equity-linked debenture of Reliance Capital. Should you?
Reliance Capital, which has investments in broking, insurance and asset management and investments through private equity and investment banking, has launched its S&P CNX Nifty Index Linked Debenture named Series B-57, and its exclusive distribution has been handed over to HDFC Bank. Many of the bank's customers are being wooed to buy this product. Does it make sense?
Key Features of ELD
The product is a 40-month equity-linked debenture (ELD), whose performance is linked to S&P CNX Nifty with the following return structure:
• If at the end of the 36th month, the market is higher than the initial level (by any quantum), the investor gets an absolute return of 49%, which equals an annualised compounded rate of return of 12.68%
• If at the end of the 36th month, the market is lower than the initial level, the return will reduce by 2.45 times of each percentage reduction in the index. For example, if the market falls by 5% the return will reduce by (2.45*5)%, that is, 12.25%. Therefore, the final return for the investor in this case would be 49-12.25=36.75%, which is an annualised rate of return of around 9.9%. The compounded return comes to 9.9%.
• If the market falls beyond 20%, the rate of return becomes 0% (because 20*2.45=49%), and the investor gets back only his/her initial investment.
The following table gives a complete scenario at different Nifty levels.
| Initial investment | Market movement | Return (percentage) | Return in rupee terms | Annualised rate of return |
| Rs50,000 | + 10% | 49% | Rs74,500 | 12.68% |
| Rs50,000 | +5% | 49% | Rs74,500 | 12.68% |
| Rs50,000 | 0% | 49% | Rs74,500 | 12.68% |
| Rs50,000 | -5% | (49-(2.45*5))=36.75% | Rs68,000 | 9.9% |
| Rs50,000 | -20% | (49-(2.45*20))=0% | Rs50,000 | Nil, you get back you initial investment |
| Rs50,000 | -30% | (49-(2.45*30))= -24.50%, but you will get 0% | Rs50,000 | Nil, you get back you initial investment |
What works in its favour:
• It is an AAA-rated security and therefore has the highest degree of safety in terms of getting timely returns. The rating, however, can be revised and changed whenever the rating agency gets new information about the financial condition of the company.
• Your initial investment is secure till maturity. Even if the markets crash in the 36th month of your investment period, you still get back your investment.
• A coupon rate of 49% for 40 months works out to be an annualised compounded return of 12.68%, a good return for a fixed investment in a stagnant or falling interest rate market.
What works against it:
• If you do not hold the debenture till 40 months, your initial investment is not guaranteed. That means if you want to withdraw your money, your returns may be linked with the actual return of the market. The brochure does not give any information on this issue.
• Also, if the company buys back the debentures, the return will be calculated on basis of fair market value and that could hurt your initial investment as well.
• Besides these, credit risks attached to debentures stand
Does it make sense?
Every single recommendation regarding this product will start by saying: "If you are bullish about the markets..." In effect, the onus is on you to make the product work for you. Remember, the essential factor behind the success of the product is your successful market call. Do you want to be a market forecaster to make 12% plus?
Apart from this, there is another basic flaw in all these structured products. It never makes sense to mix fixed income products with market-linked products. You cannot calculate the odds of total returns if you mix fixed income products with market index. They are essentially totally different products in nature and all you are doing is reducing the effectiveness of one with the other. You must stick to an asset allocation plan which will mean investing in a systematic manner in fixed income (bonds, bond funds, fixed deposits and debentures) to protect your wealth and separately in shares or well-chosen equity mutual funds to grow your wealth.
In this case, who really knows what the Nifty will do three years from now and why would you want to bet on that outcome? Also, 12.68% compounded return in the best of circumstances is nothing attractive; there are perpetual bonds, for instance, which could give you similar fixed returns with an upside if the interest rates fall, without you having to bet on the direction of the Nifty.
Sourece:MLF
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