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|Subject: Market Index Certificates - Opinion?||Date: 11/18/2003 3:01 PM|
|Author: goodald||Number: 8878 of 35400|
I have a 'largish' amount of cash sitting around earning 2% in my ingdirect account. This is in addition to my emergency funds and I feel confident that this additional amount will not be needed anytime in the next 2 years. After this time I will probably want to use this, and some additional cash I would have saved, as a downpayment on a mortgage. In looking at various alternatives for the investment (I bonds/kept in savings etc..) I came across an investment that my bank offers that I am not too familiar with but may be worthwhile.
As a riskier option my bank offers a Market Index Certificate.
From the date you invest the funds (1,2,3,5,7 year increments) at the maturity date the values are compared. If the index has gone up I earn dividends equal to a percentage (called participation percentage) of the increase. If it has gone down or stayed the same I earn nothing but do not lose any of the initial deposit.
In the example they provide:
Purchase a certificate when S&P is at 600. Two years later it matures and the S&P is at 720, a 20% increase. Multiply that value by 75% (participation percentage) to obtain earnings rate. In this example 15% is earned (7.5% per annum)..
There are some drawbacks-
>the sell date is out of my control (always at the 1,2,3 etc.... year increment..
>The participation percentage eats into potential gains.. I'm also guessing the earnings would be taxed at normal income rate...
I'm not exactly sure what the participation percentage may be other than the example they give-I'm guessing it may be lower on a 1 year and higher on a 5 year. The fact that you will not lose any principal is a plus... Perhaps buying 4 500 dollar certificates spread out over 4 months? At most I would lose out on about 80 dollars in interest I would have earned had it stayed with ING... (a bit more with bonds)
Just looking for some input-especially from anyone who has experience with this product. Thanks! :)
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