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Investor Education > Managed Funds > Capital Guaranteed Investments

CAPITAL GUARANTEED INVESTMENTS

Capital guaranteed funds – also known as capital protected funds – are investments that include a capital guarantee of the initial investment amount, usually up to a set percentage (often 100%). For example, an initial investment of $10,000 in a capital protected fund with a 100% capital guarantee will ensure that the investor will receive at least the initial $10,000 back if the fund performs poorly.

Many capital protected products only include a capital guarantee for funds at maturity, requiring that investors hold the investment for the full term. Investors should note that the terms and conditions of any capital guarantee is likely to vary depending on the investment, so it is important to read the product disclosure statement for full details.

Types of capital protected funds

Over the past decade, structured funds with a capital guarantee have grown in popularity in Australia, as they may limits losses in falling markets while still providing the investor with exposure to markets that offer the potential for capital returns. Capital protected structured products are available at different times of the year for a range of investments themes, ranging from emerging markets and BRIC economies (Brazil, Russia, India and China) to commodities and alternative investment themes. They often provide access to investments, fund managers or markets that are not usually available to retail investors, and may add diversification to a traditional investment portfolio. In addition to capital protection, some structured investments may provide a gearing facility for investors to borrow up to 100% of the investment amount.

How products are protected
The capital guarantee of a fund can be achieved in a number of ways:


  • A simple capital guarantee where the issuing institution uses a hedging to mitigate the downside
  • Using part of the initial investment to purchase a zero coupon bond that will return original capital at maturity
  • Continuous portfolio protection insurance; involves switching the capital out of the underlying investment into cash if it’s falling in value and sets off a trigger point.


Rising capital guaranteeSome funds will increase the guaranteed amount with the investment’s performance when set hurdles are met, known as a rising capital guarantee. When the performance of these funds rises above the benchmark the guaranteed amount will increase according to a set of rules stated in the product disclosure statement.

Effect of inflation

It is important to keep in mind that though a capital guarantee fund may provide an investor with the security of protecting the initial investment amount, an amount invested today is unlikely to have the same real value at the maturity date. Many protected structured products have an investment term of 5 to 7 years, so it is important to be aware that the real value of the initial investment will be reduced by inflation over this period.

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