NDF Administration has established the protected income & growth plan 1, a guaranteed equity bond that enables investors to invest for income or growth.
The bond provides annual income of 6 per cent or monthly income of 0.46 per cent for five years. There is also a growth option of 35 per cent after the full term of five years and two months. Investors will get a full capital return unless the FTSE 100 falls by more than 50 per cent during the term without recovering to its initial level by the end.
If the FTSE 100 index falls by more than 50 per cent from its initial level on March 17, 2003 without recovering by May 12, 2008, capital erosion will occur. For the annual and monthly income options, capital will be reduced by 1 per cent for every 1 per cent fall in the index. With the growth option, investors will lose 1.35 per cent of their original capital for every 1 per cent fall in the index.
This bond is simpler than some products, but it is still complicated compared with growth-only products such as Britannia Building Society's guaranteed capital equity bond. The Britannia bond offers the same level of growth as the NDF product with no risk to capital. This suggests that the NDF product may be most suitable for income investors.
Income investors are disadvantaged because although the full term is five years and two months, they do not receive income for the final two months of the term. However, income investors could lose capital at a faster rate than growth investors could if the index falls beyond 50 per cent and does not recover to its starting level.