Keydata Investment Services has brought out the third issue of its dynamic growth plan, a guaranteed equity bond that offers investors five times the growth in the FTSE 100 index up to a maximum return of 60 per cent.
The bond also provides investors with a full capital return unless the index falls by more than 50 per cent during the term without recovering to at least its starting level.
Calculations are based on the closing level of the index on the first day of the term, which is compared with the closing index level on the final day of the term. If the index falls below its starting level without recovering by the end of the term, capital will be reduced by 1 per cent for every 1 per cent fall in the index.
This bond is likely to be of interest to investors who are willing to give up some of the potential growth they could get by investing directly in equities, in return for partial capital protection. Some investors may appreciate this type of product if the slump in equity markets has put them off direct stockmarket investing and there could be some interest from self-invested personal pensions looking to diversify.
However, averaging is not used at all when calculating the returns, so the final return is ultimately based on the performance of the index over two days. This could be a drawback if the index rises throughout the term but falls towards the end.
Investors must take on the risk not only of potential capital erosion, but also the risk of exceptional growth in the index as this will not be passed on to them above 60 per cent.