NDF has introduced the growth plan October 2004, a FTSE-100-linked capital-protected bond which could mature earlier than the six-year investment term.
The bond provides a full capital return provided the index does not fall by 50 per cent or more during the term. Even if it does, investors will still get their capital back as long as the index returns to at least its initial value. If it fails to recover, investors will get no growth and will lose 1 per cent of their capital for every 1 per cent fall in the index.
The early maturity feature means that each year, if the index is the same or higher than the initial level of the index, the bond will mature and investors will get a specified return. In year one this is 8 per cent, in year two 16 per cent, in year three 24 per cent, in year four 32 per cent and in year five 40 per cent. If the bond manages to run full term, investors will get 100 per cent of the growth in the index.
Premier Fund Managers currently offers the Premier growth plan - limited editions no 22, which is a similar six-year FTSE 100-linked product with an early maturity feature. Like the NDF product capital will be reduced by 1 per cent for every 1 per cent fall if the index falls by more than 50 per cent or more during the term and does not recover by the end.
If, at each anniversary, the index level is the same or higher than the initial level of the index the bond will mature. Investors will get 7 per cent, 14 per cent, 21 per cent 28 per cent 35 per cent or 42 per cent of their original investment respectively. During years one to five, the potential returns are slightly higher with NDF, but the products differ where they run full term.
In the final year, NDF will offer 100 per cent of the rise in the FTSE, which is uncertain compared with Premier's 42 per cent of the original investment. However, the uncertainty with NDF is not necessarily a bad thing, as the index could rise by more than 42 per cent to exceed the fixed return offered by Premier.