First of all, what is a capital guaranteed fund? And why would you want one.
If you invest in a typical managed fund, say $10,000. Your money is invested by the fund and may or may not profit, in fact, recent history shows us that your initial money can reduce. After 2 years you might be faced with only $8,000 in your account. Hopefully, your account has gained!
A capital guaranteed fund essentially guarantees that your NEVER lose your initial money. So the fund can ONLY increase.
I’m sure that sounds good to most of you.
Most people like you, use these types of funds to “protect” a certain percentage of their total portfolio.
Most capital guaranteed products have average to poor performance. But, as stated, they don’t lose value.
“What about the capital guaranteed fund with above average returns?” I hear you ask.
Like most things in finance and investment, this strategy is not that complicated and whilst a particular outcome can never be guaranteed, you can put your investment capital into a strategy which has the potential to yield excellent results whilst not exposing your investment capital to undue risk.
Everybody is familiar with bank term deposits, such deposits are as about as risk free investment as you can get. So it is not hard to imagine a scenario where if you placed an amount on deposit after a predefined term you would get a predefined amount back.
If you are in the US, you would use zero-coupon bonds and not bank deposits for this exercise.
For the sake of this example assume you take your $10,000 which can be invested for a period of 10 years.
In this example, at the very least we want to receive our capital (the $10,000) back in 10 years time.
Using a financial calculator or a spreadsheet it’s a relatively easy function to calculate what amount needs to be invested at a certain rate to yield $10,000 at the end of ten years. At this point I would suggest you look a little bit further a field than the average bank term deposit. Obviously the better the rate the less of the $10,000 needs to be invested to get us back to $10,000 over the 10 years.
A couple of products come to mind that will expose your capital for only slightly more risk when compared to a bank term deposit but are yielding around 9%.
So by investing $4,224.11 at 9% over ten years we have our capital guarantee in place.
With the remainder of $5,775.89 we have plenty of options, the purpose of which are to generate high returns secure in the knowledge that in the worst case scenario we will still have our $10,000 back at the end of 10 years.
One option might be to invest this risk portion of our capital in a new mining company listing on the stock exchange in the hope that they strike gold.
Whilst I would never recommend such a strategy for all sorts of reasons you would still get your original $10,000 back if they didn’t.
A more appropriate strategy might be to invest in a high yield managed fund.
For the sake of this example I have picked managed funds because they have easily accessible historical data. If you had implemented this strategy 10 years ago using the Perpetual Industrial Share Fund (http://www.perpetualinvestments.com.au/) for the risk portion of your original capital $5,775.89 would have grown to $24,402.75.
Add this to the return provided by the capital guarantee and you have a total return of $34,402.75 or 13.15% pa.
In other words, that’s 13.15% every year for 10 years without EVER RISKING YOUR INITIAL CAPITAL
Obviously this assumes income is reinvested and the effect of tax, inflation and imputation credits has not been taken into consideration. Everyone’s personal financial situation is different and I would be remiss if I did not recommend that everyone seek their own advice in this area.
So there you have it. Your own, do-it-yourself, capital guaranteed fund which has provided a return of over 13% per year.
Essentially this is what the promoters of all the off-the-shelf capital guaranteed investments are doing without the bells and whistles and without all of the associated costs which seriously impact investor’s (your) returns.
This is just one strategy which you could implement as an independently minded investor.
Oddly, ASIC in Australia is not keen on capital guaranteed funds. Therefore you’ll need to look overseas for these funds, if you don’t want to make on up yourself.
In Asia, they are THE most popular fund that is available for retail investors.
“Murray Priestley has 25 years of commercial and asset management experience having served in board, CEO and senior executive positions with a number of global public and private companies.”