Consumers that purchased high income or growth fixed term investments could be in for a shock soon, as some three-year deals are soon to reach maturity.
These investments are generally known as 'high income' or 'structured' because of the way they are invested. Most offer a three or five year term, paying a higher than usual income and with the capital linked to the movement in a particular index, for example the FTSE 100 or the DAX 50.
Due to the poor performance of indices over the past three years, some of the investments made may only return a tiny proportion of investors' capital. There may not be a return of capital if investors have taken income over the term.
Companies offering these so-called 'precipice bonds' such as AIG Life and NDF have tranches of investment maturing during May this year and the predictions for returns are very poor.
Our View
Structured investments are only suitable if investors understand the risks involved. If you are linking the return of your capital to, say, 50 stocks, the risks can be high. For some investors that need very high income but are not worried about capital return, then these investments will have done their job. However, if the markets had done better, a higher level of capital would have been returned.
It is always our view that people should not invest unless they understand the maximum downside risk. If you are unsure, do not invest. Likewise, if you have one of these investments and are unsure of the risks involved, contact us.
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