Investments that offer a ‘capital guarantee’ or ‘capital protection’ look like a great way to have your cake and eat it too. They claim to give you the ability to enjoy investment returns in the good times. While protecting you from losing your money if it all goes pear-shaped. However, investors need to do their research, as these products may not be the right option for everyone.
How is the guarantee or protection provided?
Let’s look at how a guarantee or protection on your capital is achieved by structuring investments in a variety of ways:
• Some investments provide a guarantee by investing through a life insurance company.
• Others use a portion of the money you invest to buy a bond to provide capital protection and then invest the remainder of the money in options and other derivatives.
• Other ways of delivering a guarantee include combining a guarantee from a bank with hedge fund or derivative investments.
No two capital guaranteed or protected investments are the same, so you need to pay special attention to the structure, investment maturity date and terms and conditions that apply.
10 things to consider:
- Investing in a guaranteed or protected product is not the same as putting money in a bank or building society.
- The benefits of protection need to be considered against the cost.
- The guarantee is only as good as the guarantor behind it.
- Inflation can eat into your capital even if falling investment markets don’t
- You might not always be able to lock in investment gains when you want to
- Barrier or knock-out events can reduce or eliminate your investment earnings
- Check on early redemption
- Beware of termination clauses.
- Beware of “gearing the product.
- Tax considerations should not be the sole driver for investments.
No investment is 100% secure. In certain extreme circumstances (for example, if the company providing the guarantee or protection goes belly-up), you can still lose your money. Even if you are confident about the security of the guarantee or protection, you need to weigh up the cost of these products with the benefits they can provide.
While these products may well suit some individual investors, studies show most people are far better off with a sensible and balanced portfolio of bonds and equities over time. And therefore one should consider all facts and speak to experts before making any financial decisions.
Bruce Baron, CEO GFC. Bruce has spent his whole career in financial services. As the CEO, Bruce spearheads the direction of the company. He leads the investment committee to ensure consistent and pertinent advice is given.