Factsheet: Capital guaranteed or protected investments
ONLINE TEXT VERSION - January 2013
Capital 'guaranteed' or
Wouldn't it have been great if you had been able to protect your
investments from tumbling investment markets during the global
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.
Investors need to do their research, however, as these products
may not be the right option for everyone.
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.
What are capital guaranteed or protected products, and are they
right for your investment objectives?
Capital guaranteed or protected investments may interest you if
you want to have exposure to investment markets, but want some
protection against losing your capital.
Ultimately, the answer to the question 'Are these investments
right for me?' depends a lot on what you are hoping to get out of
your investments, including how much risk you are willing to bear,
whether you need a regular income and whether you need access to
For example, if you are young and have a long investment
horizon, you may want more exposure to growth assets, while people
who are retiring may be more interested in preserving their
How do these products work?
When you invest in shares or other market-linked investments,
there is a risk that the dollar value of your investment can go
backwards as well as forwards.
Some capital guaranteed or protected investments offer you the
ability to earn a market-linked investment return, while having the
security of knowing that you will at least get back the dollar
value of your initial investment amount at the maturity date if
investment markets turn sour.
For example, a capital protected investment linked to Australian
shares may offer to pay investors a return equal to 80% of the
cumulative growth in the S&P/ASX 200 share index over five
years, with a promise that if the cumulative growth turns out to be
negative you will still get back the original amount you invested
at the end of the five years.
Most capital guaranteed or protected investments are for a fixed
term, generally of five years or more, and fees usually apply if
you want to exit the investment before the term is complete. The
guarantee or protection generally only applies if you hold your
investment for the full term.
How is the guarantee or protection provided?
The 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
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 think about
before investing in capital guaranteed or protected products
1. Investing in a guaranteed or protected product is not the
same as putting money in a bank, building society or credit
Capital guaranteed or protected investments are structured,
complex investment products. Even though banks and other authorised
deposit-taking institutions such as credit unions and building
societies may offer capital guaranteed or protected investments, if
you invest in one you don't have the same security or rights that
apply when you put money into a savings or transaction account. The
guarantee offered on capital guaranteed products is not the same as
the Australian Government Financial Claims Scheme, which protects
some deposits at authorised deposit-taking
Different capital guaranteed or protected investments can have
very different investment and legal structures. Make sure you read
and understand the Product Disclosure Statement (PDS) or the
prospectus for an investment to find out how the guarantee or
protection is provided (for example, by a bond and a call option or
by dynamic hedging).
It's also important to check where you would stand as an
investor if the investment turns sour or the company providing the
investment (the 'issuer') gets into trouble. Some capital
guaranteed or protected investments are secured against separate
assets, whereas with other investments, investors only rank as
unsecured creditors if things go wrong.
2. The benefits of guarantees or protection need to be
considered against their cost
Like any investment product, there are fees and costs involved
in capital guaranteed or protected investments. You need to weigh
up the cost of the protection against the benefits the product
offers and consider what's right for you. The PDS or prospectus
should contain information on all the fees and costs that apply, so
always read it and ask the issuer or your financial adviser for
more information if you don't understand something.
Generally, these products are more expensive than simpler
investment products because of the extra cost of providing a
guarantee or protection. This does not necessarily mean, however,
that the returns will be higher, especially over the medium to long
term. While investment markets can go up and down over short
periods of time, in most investment classes the risk of a long-term
decline is much less.
If you buy the investment through a financial adviser, a
commission may be paid to the adviser as well. Several of these
products do not pay any returns until maturity, which may not be
suitable if you need regular income.
Some capital guaranteed or protected investments also limit the
capital growth you are entitled to if the investment goes well. For
example, your overall cumulative investment return over the life of
the investment may be capped at 70%. While this sounds like a lot,
it is a little less than an annual return of 8% per annum for a
seven-year investment. If investment markets perform better than
this, investors in a product with capped returns could miss out on
the extra upside.
3. The guarantee or protection is only as good as whoever
stands behind it
Before you make an investment in these products, you need to
assess the risk that the issuer or the provider of the capital
guarantee or protection could fail to meet some or all of their
obligations to you as an investor (for example, their obligation to
return all your capital on the investment maturity date). In
investment-speak, this is called 'assessing the counterparty
When you look at capital guaranteed or protected investments,
make sure you find out which company is responsible for providing
the guarantee or protection. This information should be clearly
disclosed in the PDS or prospectus. Often the investment is issued
by one company, while the underlying guarantee or protection is
provided by another.
You need to consider the financial strength and stability of the
company who actually provides the guarantee or protection,
especially when it is provided over a number of years. Check if
there are any circumstances in which the guarantee or protection
could cease to apply (for example, if the issuer or the company
that has provided the guarantee or protection becomes
The following information in the PDS or prospectus can help you
assess the counterparty risk of a guaranteed or protected
- Which company is actually responsible for providing the capital
guarantee or protection?
- If this is a different company than the issuer, are there any
circumstances in which they can withdraw their guarantee or
- If something goes wrong, what assets or other means does the
issuer have to meet its obligations to investors in the product?
Are investors secured or unsecured creditors?
- What is the financial situation of the company responsible for
the guarantee or protection? What assets and liabilities do they
- If they have a parent company or are part of a group, are their
liabilities guaranteed by the parent company or another company in
the group? If not, you need to look at the financial situation of
the specific company providing the guarantee or protection and not
the parent company or the group as a whole.
4. Inflation can eat into your capital even if falling
investment markets don't
Capital guaranteed or protected investments promise to at least
return the money you initially invested at the end of the
investment term. Nearly all of these products do not, however, make
any adjustment to reflect changes in inflation.
Inflation means that the purchasing power of money declines over
time, so a fixed amount of money (that is, your initial investment
amount) is worth less in the future than it is today.
For example, if you were to invest $100,000 today for five
years, you would want to get back at least $115,927.41 at the end
of the five years to ensure that your money has not been diminished
by inflation (assuming inflation is 3% per annum).
Most capital guaranteed or protected products do not include
inflation in their protection and so will only promise to return
you the original $100,000 at the end of the five years.
5. You might not always be able to lock ininvestment gains when
you want to
Some guaranteed or protected products allow investors to 'lock
in' investment gains. This means that if the investment increases
in value before it matures, you can increase the capital guarantee
or protection to reflect the higher investment value. It's worth
checking the details, however, as you can generally only do this at
specific times (often only once a year). Investment markets can
move quickly, so this feature may not be as beneficial as it
6. Knock-out events can reduce or eliminate your investment
Check the PDS or prospectus carefully to see if there are any
'knock-out' clauses that apply to the investment. Generally, if a
knock-out event occurs (for example, the market price of the
investment to which the product is linked falls more than 30% below
the purchase price), investors lose all entitlements to any
investment earnings. In this case, you would only be entitled to
receive the amount you initially invested. This would be paid to
you when the product matures, which could be many years away. Some
investments call these knock-out events 'barrier' events.
7. Check if you are able to get your money out early
If there is a chance you may need to access your money in a
hurry, carefully consider the investment terms and conditions
relating to early redemptions. Most capital guaranteed or protected
investments don't mature for five years or more, and hefty break
fees can apply if you want to get out early. In addition, if you
exit the investment early, the guarantee or protection may not
apply, and you could get back less money than you originally
8. Be aware of early termination clauses
On the flip side, some products give the issuer the discretion
to terminate the investment early if any one of a number of events
occurs. In this case, the capital guarantee or protection can end
early too, whether you want it to or not. The PDS or prospectus
should outline these discretions.
9. Be aware of the extra risks of borrowing to invest
Issuers of capital guaranteed or protected products may offer
investors the option to borrow to invest in the product (often
called 'gearing'). Some products are geared by as much as 100%,
which means you borrow the entire amount that is invested. Even
100% geared products will still require you to put some of your own
money in at the start. You should be aware that this money will be
used to cover interest and set-up fees for a loan, or to get
exposure to the performance of assets such as shares.As a result,
it is not covered by the capital guarantee or protection.
Regardless of how much you gear, the investment will need to
earn a return high enough to cover the costs of interest and fees
that come with borrowing, otherwise you will not break even despite
any capital guarantee or protection.
You should check the PDS or prospectus, ask a financial adviser,
or find independent research to work out how much the investment
needs to earn before you would break even or make a profit.
10. Tax considerations should not be the sole driver of
Many capital guaranteed or protected investments are marketed on
the basis of the tax advantages they can offer to investors. While
upfront tax advantages are appealing, a good investment is one that
delivers you a real investment return, not just tax deductions.
Investors need to consider the investment merits and credentials
of the underlying investment, any possible legislative changes that
could affect the tax benefits and, finally, whether the fees and
costs associated with making the investment are greater than any
tax benefits received.
We all want to avoid the pain of seeing our hard-earned
investment dollars go backwards. Investments with capital
guarantees or protection, simple as they might sound, are actually
more complex than regular investments.
Before you invest, make sure you do your homework. If you are
clear on your investment objectives first, you have a basis for
evaluating whether potential investments, including capital
guaranteed or protected products, are likely to meet your needs and
Last updated: 08 Feb 2017