You may have read about capital-protected investments in passing, your adviser may have mentioned them, and they look complicated. But what are they?

Basically, most of the money in a capital-protected investment plan is invested into a low return/high-security investment (like bonds) to make sure you get most of your original investment back at the end of a minimum period – this is the capital protection. A much smaller amount of the money is invested to give you a return, usually in a more risky venture such as options.

What if I borrow money for a capital protected investment?

In cases where you take out a capital protected investment based on a loan, you are then charged both the interest on that loan and, in some cases, the embedded financial adviser's fees.

Will I make any money?

While your capital is protected, you could still make a loss. Where your investment is not gobbled up by fees and interest, it may be possible to make a tidy investment return. However, it's also possible to only break even and get your original investment back – which means that you are actually behind due to inflation.

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


Capital-protected investments can also be very complex and hard to understand. Generally, complicated products are riskier 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.
  • Fees, fees, fees. Who's getting them? Financial advisers, entry fees into a capital protected product – know where your money is going so your potential return isn't eaten up by fees.

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 six years with no further returns on their money.