Monday, September 29, 2008

Protection of capital - useless assurance ?

From www.bloomberg.com :
Lehman brothers, recently in August 2008, issued notes/bonds that promised 100% protection of capital. In the worst case, borrowers would get back their $1,000-per-note investment in three years. Only the last in a list of 15 risk factors mentioned the biggest danger: ``An investment in the notes will be subject to the credit risk of Lehman Brothers.'' Lehman's Sept. 15 bankruptcy leaves holders of the notes waiting in line with other unsecured creditors for what's left of their money. The assured protection of capital has vanished in thin air.

Now, in India, our good friends from the US of A have set up many offices as banks and mutual funds. Some of them have started offering exotic options to retail investors in India. A plain vanilla option is the FMP - Fixed Maturity Plan. This plan offers higher interest as compared to bank deposits, with the added attraction of tax benefits (capital gains). I did not go for this plan since I am comfortable with nationalised banks. I also have some doubts on how these funds can offer higher interest than banks. If anyone has invested in these plans, perhaps they may like to read the fine print. If there is a fine print, please share it with me so that I can share this information with all the readers.

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