Capital investment truths

INVESTMENTS that offer high returns coupled with a capital guarantee sound like a great way to have your cake and eat it too. But the picture isn’t always as rosy as it seems.

Capital protected investments claim to deliver good returns in the good times while protecting you from losing your money if it all goes pear shaped.

It’s a tempting combination for investors. But concerns over these products have prompted our investment watchdog ASIC to issue a cautionary factsheet on the risks involved.

ASIC is quick to point out that no investment is entirely safe. And while many capital protected investments are issued by banks, they are certainly not the same as putting money in a savings account. To begin with you won’t be covered by the federal government’s deposit guarantee.

In most instances the capital guarantee on these products only applies if you hold onto the investment until maturity. If you need the cash prior this, the guarantee may be voided and you may not get all your money back.

The terms and conditions of the investment may also mean that you could get a full return of your principle – but no additional investment return at all on maturity. That’s certainly better than losing your money, but still a rotten result. Capital protected investments can run for terms extending over three to five years, and if you only protect your capital without making any additional return, you will be going backwards once inflation is taken into account.

There’s also an ‘opportunity cost’ involved as you could have tipped your money into something else – like a term deposit, to earn a guaranteed interest rate. Okay, the return may be low but it’s better than no return at all.

Consumer group Choice took a look at capital protected investments a few years ago, noting that they can be complex. According to Choice, most of your money is used to fund a low return/high-security investment to provide the capital guarantee. A much smaller amount of the money is invested to give you a return.

The complexity of these investments make it essential to read the Product Disclosure Statement carefully – don’t just look at the promotional material, and question anything you don’t understand. If you aren’t completely clear about how these products work, the warning bells should start flashing.

If you’re thinking of investing in a capital protected investment - and be aware they are marketed under a variety of names - I recommend taking a look at the ASIC factsheet. You can download it from ASIC’s consumer website at

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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