The country's high networth individuals may feel the tremors of Lehman Brothers Holdings - the fourth largest investment bank on Wall Street - filing for bankruptcy. Many mutual funds, which offer portfolio management services to HNIs, offer capital-protection schemes, which are underwritten by banks like Lehman Brothers and Merrill Lynch.

For instance, ICICI [Get Quote] Prudential's PMS has Principal Protected Portfolio IV and V, which have been guaranteed by Lehman Brothers Securities India. The 'gap risk' has been guaranteed by Lehman Brothers Securities Private (consultant), backed by a letter of comfort from Lehman Brothers Holdings USA. Given that the company has closed down its operations, the letter of comfort may not have a legal standing.

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'Gap risk' is a situation where the portfolio value falls below the bond floor (a value below which a capital protection portfolio should not fall). For instance, if the PV is Rs 86 and the bond floor is Rs 88, the underwriter will have to pay Rs 2 to the portfolio manager as a result of the the gap risk.

Such products use the Constant Proportion Portfolio Insurance mechanism and are offered by several PMS providers, which include ICICI Prudential PMS, Kotak Securities and other PMS providers. It allocates the portfolio between equity and fixed income based on the equity component's performance. Allocation to equity is increased if the portfolio value goes up and vice versa.

"We are nowhere near the gap risk event. In fact, we do not have any counter-party risk or any investments in the Lehman paper. The assets of PPP IV and PPP V are currently being managed and held only in Indian equities and cash or cash-equivalent by ICICI Prudential AMC (the portfolio manager)," said Shahzad Madon, head, PMS, ICICI Prudential AMC.