NDF Administration has introduced the NDF higher income & growth plan, a guaranteed equity bond that is linked to the 10 largest stocks on the FTSE 100 index over a five year term.
These include companies such as Barclays, HSBC, Shell and Vodafone. Investors can choose annual income of 9 per cent, monthly income of 0.70 per cent or growth at 50 per cent.
Investors are guaranteed the return of their original capital at the end of the term plus any income or growth, providing the final level of each stock is not more than 20 per cent lower than the starting level. However, those who choose the income option get this amount less the income they have already taken.
This is calculated on a sliding scale, so where one stock finishes lower than 20 per cent, income investors get 85 per cent of their capital. Where two stocks are lower than 20 per cent, the capital is reduced to 65 per cent. If three or more stocks are down by more than 20 per cent, the minimum capital return is 55 per cent for annual income investors and 58 per cent for those with the monthly income option.
Investors with the growth option get 35 per cent growth if one stock is down by more than 20 per cent, 15 per cent growth where two stocks have fallen by more than 20 per cent and just their original capital if at least three stocks are more than 20 per cent down on their starting values.
This bond's capital protection feature is a strong point for cautious investors but it is quite complicated to understand. As it is linked to a basket of stocks rather than an index, investors are also taking a more of a gamble with their potential returns. Even if one stock drops by 21 per cent, the impact will be a reduction in the overall return and this could make it unattractive to investors who want more than their original capital after five years.