With the high volatility in the equity markets and interest rates looking to go further northwards, mutual funds are introducing new products such as equity-linked fixed maturity plans.

This product was first introduced by ICICI [Get Quote] Prudential Mutual Fund (ICICI Prudential FMP Series 33) and Deutsche Mutual Fund in February. Recently, Birla Sun Life Mutual Fund has also floated a similar fund.

Typically positioned as capital protection funds, the investing strategy is something like this. ICICI Prudential's FMP (36-month closed-ended) invests 80 per cent of the fund in equity-linked debentures (ELDs are instruments whose rate of return is based on the underlying index) issued by banks and third-party issuers.

And the rest 20 per cent would be invested in AA -- instruments.

Similarly, Birla Sun Life's Aviator (36-month closed-ended) and Gladiator (21-months closed-ended) plans will invest a minimum of 70 per cent to a maximum of 100 per cent in ELDs.

They could also invest up to 30 per cent of the assets in options maturing in-line with the plan. Bhavdeep Bhatt, head of products, Birla Sun Life said that such products are being targeted at investors who are looking for the stability of debt instruments as well as some returns from the stock markets.

The returns are calculated in this manner. The fund house comes to an initial value of the underlying index, which is often the average of the first three or four months. So, if the underlying index is Nifty and it is at 3,800, 4,000 and 4,200 at the end of months 1, 2 and 3, the average is 4,000.

The final value is also calculated as the average of the last three months. If the Nifty is at 5,000, 5,200, 5,500 in months 34, 35 and 36 respectively, the average is 5,233. So, the final Nifty returns is 30.82 per cent (5,233 -4,000/4,000*100) over the three-year period.

The Nifty return, multiplied by the participation ratio (that is pre-decided by the fund) is the final returns. In Aviator, the participation ratio is 140-145 per cent, leading to returns of 43.14-44.5 per cent in our given example.

However, there are other conditions as well. There is a knockout level at 190 per cent (Aviator) that means that if the Nifty shoots up from 4,000 to 7,600 points, the returns will be capped at 57 per cent (around 18 per cent annually).

If the Nifty were to fall below the initial value, the initial investment will be protected. If the Nifty rises by 50 per cent as the returns go up to 70 per cent (around 23 per cent annually).

However, though the product as been positioned as one for the investor who wants the best of both worlds, financial planners are not too enthused. Most have the view that such products require you to take a position on the expected performance of the underlying index.

Compared to them, plain vanilla equity or debt funds are more complex in nature. Also, investors would not know the underlying assets of the papers bought by the mutual fund implies a lack of transparency. Most planners are not comfortable with this situation.