Capital Protection

Many of our clients ask our consultants about Capital Protection. In the strictest sense capital protection would mean that your money has absolutely no risk of loss however the products and investments typically available to investors are explained below

A capital guarantee product means that when an investor buys, or “enters”, this specific structured product he is guaranteed to get back at maturity a part or the totality of the money he invested on day one.

Providers of ‘capital guaranteed’ and ‘capital protected’ structured products usually promise to at least repay your original investment at the end of a minimum period.

What are capital guaranteed and capital protected products

Structured products promoted as having capital guarantee or capital protection typically combine a ‘safe’ and a ‘risky’ asset into one product structure.
For example, a safe asset, such as a bond, enables the issuer to promise the return at maturity of at least some, or all, of the investor’s original investment. This feature is promoted as the ‘capital protection’, or sometimes the ‘capital guarantee’.
These assets may be packaged with a risky derivative investment such as options. The derivatives are used to create some level of participation in the performance of shares, commodities or other assets. The value of the investment at maturity depends on the performance of these ‘reference assets’.
This is an example of how one of these products may be structured. Other products may have different asset class exposure as well as different terms and conditions that apply to the repayment of your capital as well as any investment returns. These differences make it difficult to compare one product with another.

Not bank deposits or annuities

Capital guaranteed, and capital protected structured products should not be confused with more conservative investments that may also be described as ‘protected’ or ‘guaranteed’. This includes life insurance annuities, savings accounts and term deposits with a regulated bank, building society or credit union.

Advantages of Capital Protected Investments

  • Capital guarantee funds offer some return advantages for investors comfortable with the investment’s illiquidity. The returns on these funds can be higher than savings account or money market returns. Capital invested in the funds is guaranteed. In order to minimize the fund’s risk of absorbing losses, fund managers will keep the majority of underlying assets conservative in vehicles such as bonds. They may invest a small percentage in higher risk equity securities.
  • They provide a means for low risk investors to target higher returns than those available from a bank account
  • They provide a means for low-medium risk investors to protect part of their portfolio from falls in value

Disadvantages of Capital Protected Investments

The disadvantages of capital protected investments are:

  • Charges can be high
  • Returns may be explicitly or implicitly capped
  • Early redemption may be costly or impossible
  • The capital protection depends on the financial strength of the underlying guarantor
  • Capital Protected Investments usually work in a more complicated manner than equities, bonds or cash

Capital Protected Investments usually work in a more complicated manner than equities, bonds or cash
Overall, these products can form a useful part of a portfolio. However capital protection comes at a cost, not only in charges but also in investment returns and accessibility. Investors who can tolerate more risk are usually better advised to avoid capital protected investments and instead focus on controlling risk through diversification.

CGI Consultants have the ability to source the best Capital protected product to meet our clients requirements. Please contact us for further information at info@cgiconsult.com