Capital Protected vs Capital Guarantee

Sharing a thought...

We have just launched a new fund which is our first; capital protected fund. Suitable for risk averse customers who do not want any risk to their investment capital yet want to enjoy a certain rate of return hopefully better than FD.

The duration of this fund is for 3 years only. 85% of the fund is being invested in fixed income such as debentures, money market and zero coupon negotiable instrument of deposit (ZNIDs).

The balance of 15% is being invested in equities, EFTS and equities related to gold and oil and gas sectors.

In layman term, ZNIDs is an instrument whereby loan is given to a company without any interest rate. Of course the company that offered the loan has to earn something in return since no interest is being charged.

To explain the mechanism of this loan instrument; we assume Company A requires $85million and approached Company B. Company B offered to provide the loan to A company who has agreed to pay $100milion for the loan. Therefore, the difference of $15m is the profit B company earned.

In this instance, Company B has to ensure that Company A is reputable and able to honour the loan repayment. Therefore, with this assurance and confidence, Company B is able to offer protected capital fund to its investors.

In addition, since 15% of the fund is being used to invest in equities and equities of companies involved in gold and gas & oil sectors, the possibilities of investors earning from the capital appreciation looks positive as these sectors are rare commodities and act as good hedge against inflation.

This fund eventhough its benchmarks is based on the bank's FD rate which is at 3.5% , investor could expect higher return on their investment if they believe the future outlook for gold and gas&oil look positive.

In addition, their investment capital is fully protected and there is no risk for them especially if the investor prefer to place their excess fund in the bank as FD. Now, there is an avenue where they could place their money "safely" with the hope of getting more than FD return, with the condition that they fulfill the fund's minimum investment period of 3 years.

Some customer may want to know the difference between Capital Protected and Capital Guarantee.

Using the same assumption as mentioned above, a Capital Guarantee fund would require Company B to approach a Banker to act as a Guarantor that Company A will honour the loan. In this case, there will be extra cost involved whereby investors would have to bear. The cost is to pay the banker/guarantor for their services.

Therefore, investment cost for Capital Protected Fund is much, much lower compared to the conventional equity or balance fund and also Capital Guarantee fund. The lowered cost would enable the investor to enjoy better rate of return on their investment.

Final word, this fund is only suitable for those who do not want to take any risk (ignoring inflation risk), usually prefer to keep their money in the bank as FD for many years, able to invest for 3 years and for those who may want to diversify or balance their investment portfolio.

For greater details, discuss with your UTC or drop me a line........ :)