Scottish Life International has designed a capital-protected bond that has no fixed term.
The safe combination bond invests in a combination of two capital-protected funds - UK Protected Index 100 % fund and UK Protected Index 95% funds. These funds are linked to the performance of the FTSE 100 and offer different levels of return to match the degree of capital protection.
The returns from the underlying funds are variable on a quarterly basis. For the quarter beginning March 15, 2004, the UK Protected Index 100% fund will return 24.24 per cent while the 95% fund will return 181.8 per cent.
The exact split between the two underlying funds can vary every three months. Instead of having a fixed term, the bond allows investors the chance to take their money out at each quarter. They will get 100 per cent of their original capital, less the 5 per cnet initial charge, and may also benefit from a profit lock-in feature.
There are two choices open to investors who want to lock in their profits. As the bond rises in value, the capital protection can be increased in line with the current value of the bond. Alternatively the profit-lock-in feature may be selected, allowing the capital protection to be increased by 5 per cent or 10 per cent. However, doing this will lower the risks of the investment which also lowers the bond's future growth potential.
The ability to withdraw the original investment plus any locked-in profits at three-month windows is this product's unique selling point. However, it may not encourage investors to take a sufficiently long-term view of their investment. Although the returns from the underlying funds are quoted on Scottish Life International's website, the bond's variable split between them may make it difficult for investors to understand how the returns are calculated.