Investing and sleeping at night – The guaranteed investment .jpg

Investing and sleeping at night – The guaranteed investment


THERE ARE a number of worthwhile investments available for all sorts of investors, but it is often difficult for the layman to sort the wheat from the chaff. Your portfolio should contain a diversified range of asset classes to mitigate risk, allow for capital growth and produce steady income if required.

One asset class I recommend to most investors, as a stabilising influence in the portfolio, which offers overall risk reduction, is the guaranteed investment bond. A guaranteed bond promises to pay a return, usually related to the performance of stockmarket indices, but without any risk of capital loss. Most such investments promise to return at least 100 per cent of your capital, providing you hold the investment until its maturity, which is usually around five years, regardless of what happens in the investment markets. Indeed, it is an investment that cannot fall in value and, in normal market circumstances, can only go up!

These investments are normally designed to provide the investor with a tax efficient return at the end of the investment period. This is an alternative investment for many individuals, who do not want direct equity market exposure or risk, but, who neither want to see their spending power eroded by receiving only the low level of returns currently payable on deposit accounts.

Guaranteed bonds were created to counter market volatility (so are even more attractive at the moment!) and aim to provide a better return than if you held your capital in an interest yielding bank account. With a guaranteed bond, your only risk is losing the interest you would have earned if you had placed your money on deposit in a bank or building society account. It is a small risk compared with the potential growth and returns to be had from a guaranteed bond.

Many guaranteed bonds invest in equities, and the beauty is, therefore, that investors get to participate in the stockmarkets and benefit from rising share prices, but, at the same time, are protected against volatility and falls – a bit like having your cake and eating it. These investments are highly suitable for retired expatriates, who are unfamiliar with stockmarkets, or wary of them, but who appreciate their potential and would like some participation in them.  

They are also useful for current investors wishing to “lock in” gains. If you have an investment that has done well, you can move your profit into a guaranteed bond to protect it, but leave the initial capital invested.

When equities perform well, they can produce a very healthy return. If you invested directly in the stockmarket, you could reap all the good rewards as well as getting your capital back. But, if the stockmarkets experience a prolonged fall over your investment period, you could find your capital eaten into, or you might be tempted to sell out at the wrong time. A guaranteed investment will protect you against any falls, prevent you making rash, detrimental decisions and enable you to invest in equities without the higher risk and the work of monitoring your shares.

What is involved?

First of all, when looking for a product to choose, you ideally need to find one that offers 100 per cent participation. Some structured investments limit growth potential by applying a cap, for example, 75 per cent growth over five years, or 75 per cent growth of an index like the FTSE 100.

You also need to consider where your monies will be invested. I would recommend linking to four indexes covering the world’s main markets, such as the FTSE 100, the Nikkei 225, the S&P 500 and the Eurostoxx 50. Some bonds “ring-fence” each index within the fund, so if one index declines, this won’t affect the return from any other that has increased. A loss in one index will not eat into gains made in the others.    

Some bonds even offer a bonus, possibly up to 20 per cent, if all four indices end the investment period above, or equal, to their level on the start date. You also need to check that the bond has been backed by a reliable creditworthy bank.

If you wish to cash in part of your bond at any stage, what you will get back will depend on the current market conditions at the time. The capital guarantee applies to a bond being held to full term and, if you encash all or part of your investment early, you may not get back your full capital investment.

The nature of a guaranteed bond is that there are just a few weeks in which to invest, from the bond becoming available to the time the offer closes. So, once you have a bond in mind, it is a good idea to liquidate any assets you need to, in order to have the monies ready to invest in your bond. If taking time to complete all your research causes you to miss out on one investment date, there is no need to worry. Another similar opportunity will come along in the not too distant future.  

A guaranteed bond may sound irresistible, but it could be even more so if you place the investment in an offshore wrapper, where the gains can accumulate tax free. Carefully choosing the time of encashment could minimise, or eliminate, tax liability altogether. Your adviser will be able to explain all the options to you, while leaving you to make the final decision on which guaranteed investment is right for you.

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