Three New Capital Protected Investment Plans Added Today. ‘100% capital protection with a maximum of 100% growth after five years and no charges’. These are the sorts of headlines that investment companies are tempting you with to invest in the stock market at the present time. Yes, they are tempting.
Many people are watching the stock market and trying to guess when is the right time to invest. Over the medium to longer term, investing some, not all of your money, in stocks and shares based investment can provide a significant boost to your savings provided you time it right. The fear is that markets will not perform and you will lose all or part of your money. To this end many financial companies are launching investment policies which have some form of capital protection. When looking at the flood of these so-called ‘guaranteed’ or ‘protected’ investments you need to look very closely at the small print. You need to check if they are truly guaranteed to return your money and this takes thorough investigation in most cases. If you come across an investment that carries a return looking too good to be true, with a guaranteed return of your capital – read very carefully. Most ‘protected growth’ products are sold that way, protecting your original capital investment at the end of the term. However, if you are taking an income from the investment, the value of this could be deducted from your original capital at the end of the investment term. Strictly speaking you have had your original investment back – but in the form of income throughout the investment term and some capital back at the end.
This may be the case where the particular market or markets the investment was linked to performed badly. Protected products are generally limited offer i.e. they are only available for a few weeks before the offer closes so you have to act fast when they become available. This is why we have launched a new service providing details of the many stockmarket linked protected investments. Click here to view this service.
Would you like a factsheet about the pros and cons of protected stockmarket investments? Contact us.
How can they offer capital protection with no charges? Most of these types of product actually work by investing in derivatives. Derivatives are not actually stocks and shares they are financial instruments to enable the purchase of stocks and shares.
Example of How A Five Year 100% Capital Protected Product Could Work
A £100 Option Future Derivative in XYZ stock costs £10 but is technically just a deposit to buy £100 of XYZ stock at a given point in time if the price is right. In simple terms, you have placed an order on credit and will pay for it later. In this way a protected product fund would buy let’s say £100 exposure to the stock market for say £10 of the cost. You don’t see it but some of your money goes into a cash account. They take £100 of your money, expose £10 to the stock market risk and put the balance of £90.00 in a highinterest rate earning deposit fund (if you read the small print you will note that these types of scheme always have some big bank involvement).
In five years the option to buy the stock comes up. The £90 deposit has had interest added at say 5% pa compound. This has now grown to £114.86. If the stock market has gone up over 5 years. Out of the £114.86, the option is then bought for the remaining deposit owed i.e. £90. You have now bought your 100% stock market return and the policy provider has £24.86 to keep for themselves as profit.
If the stock market has gone down over 5 years. The option is not exercised and the £10 deposit is lost. Out of the £114.86, you are given back your £100 (this is capital protection at the 5th anniversary). The policy provider has £14.86 to keep for themselves as profit.