An offshore Indian fund is offering investors an investment product that promises to capture the strong growth expected in IndiaÆs stock market while protecting against the risk of a fall in stock prices.

The five-year note, offered by the India Emerging Opportunities Fund, is structured using constant proportion portfolio insurance (CPPI) and is sold in US dollars out of Mauritius to avoid taxes on capital gains and dividends. The stocks are picked by ASK Raymond James, the investment adviser, and Deutsche Bank provides the principal protection.

To start with, the India Capital Guarantee Series I will invest 80% in equities and 20% in high-grade fixed-income instruments, with half the equity allocation in Indian index futures. The CPPI methodology maintains a dynamic balance between the two elements of the portfolio, to ensure that the principal can be repaid in full at maturity (there is no 100% guarantee before the five years are up).

Deutsche Bank will provide the technology to ensure the portfolio stays on target to repay. Its so-called gap risk guarantee will be invoked if at any time the portfolio loses enough value to threaten the full repayment at maturity, at which point the equity investments are wound up and all the cash is invested in bonds and other fixed-income instruments.

In a bull market, when the portfolio value ensures repayment, the entire fund may be invested in equities. In a bear market, when the portfolio value is under threat, the exposure to risky equities is cut back. This dynamic hedging ensures that the fund always gives maximum possible participation in equities.

Indian companies certainly offer the potential for good returns. The stock market has been charging forward since 2003 on the back of buoyant manufacturing and services sectors. But in such a strong market, some investors may wonder if they need capital protection at all.

ôProtection still makes sense for a lot of investors,ö says Bhadresh P Soni, senior vice president of international business development for ASK Raymond James in Mumbai. ôSomebody looking to invest in equity for the first time, for instance, may not wish to expose the principal to any downside risk.ö

The strength of IndiaÆs stock market growth gives even some more experienced equity investors pause for thought û during the past four years the Sensex has risen from the 4,500 mark to more than 14,000 today. ôItÆs a fear of heights,ö says Vinod Aachi, co-head of equity structuring at Deutsche in Singapore. ôThe market's value has increased significantly and with volatility becoming a factor, investors are starting to seek protection.ö

The fund is being marketed to high net-worth individuals, private clients and institutions such as pension funds. The note will have a minimum investment of $35 million and a maximum of $50 million, and is on offer until March 23. Investors pay a total of 4.25% a year in fees, which includes a 1.5% initial subscription charge.

The India Emerging Opportunities FundÆs two other portfolios, called I-Gain and I-Merge, have returned an average of about 50% a year since their launch three years ago. ASK Raymond James has roughly $500 million under management.