Capital protected investments

A guarantee on your investment sounds great but it can be deceptive.
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  • Updated:30 Apr 2008

01.What to consider

Piggy bank with umbrella

Experts say capital protection comes at a cost: most of your money is used for 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.

While your capital is protected, you could still make a loss. As a spokesperson from the Australian Securities and Investments Commission (ASIC) says, "If you just protect your capital and make no additional return, you could actually go backwards once inflation is taken into account."

These investments can also be very complex and hard to understand. According to ASIC, more complicated products are typically more risky than simpler ones.

Before going ahead with a capital-protected investment, consider the following points.

  • Do you understand the product? Read the Product Disclosure Statement and question anything you don’t understand.
  • What are the risks? Look at general risks and consider what would happen if there is a major shift in the economy and market sentiment.
  • Does the product suit your needs? Does it fit with your knowledge and investment experience? Make sure you're not risking money you might need in retirement.
  • Don't invest in a project you don't fully understand, especially if it sounds too good to be true.

Please note: this information was current as of April 2008 but is still a useful guide to today's market.

From 12.5% to zero return

In late 2007 investors in a Macquarie capital-protected investment received some bad news. Their rate of return, originally 12.5% per annum, was slashed to zero until October 2013 when their initial investments were due back.

The investment scheme, Macquarie ALPS 5, was one of several ALPS products offered by Macquarie. The ALPS 5 scheme was listed on the ASX in April 2006. It was advertised as offering a guaranteed return of 12.5% in the first year (which it achieved), with a potential for higher returns thereafter and a safety net of a capital guarantee.

But there was a catch. The investment was linked to 80 stocks listed on the US sharemarket. The rules of the scheme meant that every time one of the shares dropped by more than 45% of its initial value for three days or more — a so-called 'knockout event' — the interest rate was reduced. Once this happened to seven stocks, the interest rate would be reduced to 0%, permanently.

Because of sharemarket volatility, the seventh knockout event to hit ALPS 5 occurred late in 2007, leaving investors to carry the loss — stuck in the scheme for another 6 years with no further returns on their money.



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