These offerings are guaranteed to not decline

STAYING AHEAD

April 25, 1993|By JANE BRYANT QUINN | JANE BRYANT QUINN,1993, Washington Post Writers Group

New York -- Here's an interesting pitch for investors who know they need more growth but are scared to death about losing principal: an investment that's guaranteed not to decline, but has the potential of paying more than you'd normally earn at a bank.

It's called a SMART Note (Stock Market Annual Reset Term Note), conceived and marketed by Merrill Lynch. The first offering was made last October; another one is available now.

A similar type of investment called MITTS (Market Index Target-Term Securities) was marketed last summer and again in the winter.

Both SMARTs and MITTS offer Merrill Lynch's guarantee that in five or six years, when the notes mature, you'll get your original investment back. That's a guarantee you can probably bank on.

How much more you earn will depend on how well the stock market performs. Your interest income is tied to the gain in the

price of stocks, as measured by one of Standard & Poor's stock market indexes.

You give up the dividends that stockholders receive; with SMARTs, there's an annual cap on how high your interest earnings can rise. In return, you get a promise that your underlying investment is safe.

A handful of banks offer similar investments, in the form of certificates of deposit whose interest payments are linked to stocks. At banks, there's no cap on how much interest you can earn. Your principal is insured by the Federal Deposit Insurance Corporation up to $100,000. Your interest earnings are uninsured.

Two CDs worth considering:

Citibank's five-year Stock Index Insured Account (call [800] 328-CITI, extension 7102); and Bankers Trust's six-year Market-Linked Deposits, which are sold through regional stockbrokers like J. C. Bradford in Nashville, Tenn., the Ohio Co. in Columbus, Advest in Hartford, Conn., and Raymond James in Florida.

These investments are for savers who will leave them alone. The early-withdrawal costs are stiff.

Citibank's CDs are for individual retirement accounts, Keogh plans and Simplified Employee Pensions. Bankers Trust CDs are for regular accounts as well as retirement accounts.

The two banks use radically different methods of calculating the gain in stock prices. Comparing them, Bankers Trust comes out ahead more often than Citibank.

If you can't conveniently get a stock-linked CD, SMARTs and MITTS are an alternative. SMARTs probably won't do as well as CDs, because of the cap on your interest earnings. But MITTS should do better, because they offer a higher rate of return.

The current issue of SMARTs matures in six years and pays income currently. How much interest you earn every year will depend on the rise in Standard & Poor's 400 MidCap index of medium-size companies.

Currently, there are two types of SMARTs, with the following expected yields: (1) Up to 65 percent of the gain in the stock market index, with a minimum of 3 percent interest annually and a maximum of 10 percent; (2) Up to 100 percent of the gain in stocks, with a maximum of 11.5 percent annually and no minimum (so when stocks dive you get nothing). Because stocks rise in most years, this type of note pays the better total return.

SMARTs are listed on the New York Stock Exchange, so you can sell them before maturity. But they trade rarely and aren't very liquid, says Ronald Stuart, executive vice president at Oppenheimer.

At present, you'd get back just about what you paid for them, but prices will drop when the market declines. You shouldn't buy unless you intend to hold until maturity.

MITTS are also listed on the New York exchange. They're linked to Standard & Poor's 500-stock index, which covers big companies. No interest is paid until maturity. At that time, MITTS pay 115 percent of the rise in the S&P, starting from the day the securities were issued.

Here's a final strategy for picking up growth without enduring a capital loss. Keep 60 percent of your money in mutual funds that follow a major stock-market index and 40 percent in bond-index funds.

Over five-year periods, this stock/bond combination hasn't lost money since the 1930s.

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