Capital Guaranteed funds - Sure Win No Loss

Capital Guaranteed funds - Sure Win No Loss

How is this possible? 

This is a hybrid fund whose underlying assets comprises primarily of a major portion of fixed interest asset, usually bonds or government securities and the remaining portion in stocks and shares. This composition allows the fund to operate like a dream investment vehicle for the public whereby they can have the best of both worlds i.e. “Profit Yes, Loss No!”

This clever instrument first made it’s presence in Malaysia in the year 2002 when a lot of risk averse people were looking for a safe haven to “invest without risk.”

Invest without Risk!

Can it really be possible to invest without risk? Of course not!
The risk may be minimal, however, the risk/return tradeoff still applies and when we invest with little or no risk, we pay for it by compromising on potential returns.

How does it work?

The Capital Guarantee is achieved by compound interest earned by the fixed interest asset of the Fund.

All Capital Guaranteed funds requires the investor to stay invested in the fund for a minimum of 3 years or 5 years because the fixed interest and bond components require a fixed time frame to reach maturity. The fund discourages the investor from early withdrawal before its’ maturity period by removing the capital guarantee feature as well as paying an exit charge in the event of early redemption.

Conceptually a Capital Guaranteed fund (as well as Capital Protected Fund) works as follows:

Since the bulk of the investments are in bonds or fixed deposits, the fund has very little/limited exposure in equities. Therefore the capital appreciation potential of these funds are limited. The chart below shows how the FIA "grows" from 86.4% to 100% in the 5 years thereby attaining a situation of capital guarantee provided there is no default of the bonds.

The remaining 13.6% EQ is invested with 3 possible outcomes i.e good - growth of the 13.6%, bad - reduction of the 13.6% and neutral - no change of the 13.6%.

Capital Guaranteed Funds are usually put up for sale for a limited period of 30 – 60 days only. The capital collected is then allocated into the FIA portion and the balance of EQ is invested in stocks and shares.

This type of fund are suitable for those investors who are very risk-averse and like to invest passively in much the same way as having a 3 year or 5 year fixed deposit account.

Recently a Fund of this nature was launched and the publicity media announcement went this way:

Worried about getting burnt?
Enjoy up to 20% returns per annum with capital protection*.

However, the fund manager immediately qualifies the above headline with the fine print that reads: The Fund endeavors to protect investment capital, investors can expect 0% returns if the basket does not perform, but up to 20% returns if it does. Capital is not guaranteed. You may receive less than your capital should there be a downgrading of the issuer’s credit rating, issuer defaults, or if you do not hold the investment until maturity.

Caveat emptor. We wish you successful investing.