Capital Guranteed Products And How They Fit Into Your Portfolio

In economically-uncertain times, “equities” takes on a decidedly unappealing register to most people, especially those who have seen their stock portfolio take a tumble. It is little wonder then that financial products that offer “guarantees” to their capital become more attractive.



Just look through the newspapers or browse the Internet and you’ll probably find it isn’t too difficult to come across ads for structured deposits. These are usually touted by banks and life insurers as sound and safe products. But are capital guaranteed instruments (inclusive of structured deposits) that flood the market now really worth parking your money in? After all, most such instruments offered require a minimum number of years (usually five at least) for your capital to be locked in, before you do actually get back your capital, and whichever amount of interest promised by the issuer. Investing in such products without proper understanding of what you are getting into, can mean a hefty opportunity cost, especially in bearish times like this, where many other asset classes can offer a better value for you.


A structured deposit, as its name suggest, is a deposit structured to combine the characteristics of a fixed deposit and an investment product. The return on a structured deposit is usually dependent on the performance of an underlying financial instrument, which can be a basket of equities, REITS, bonds or even bundled credit swaps.


‘Capital guarantee’ is a much more generic term, encompassing structured deposits, but also includes products that simply guarantees a certain interest and capital, without further promising a higher bonus which most structured deposit accounts do.


Sounds appealing. But beware. Even the juiciest-looking apple might be poisoned. If you have been sharp enough to observe the marketing trends of financial institutions, capital guarantees often flood the market in bearish times like now. The reason is simple. They are designed to appeal to investors who are more psychologically averse towards losses. These fears increase as their perceived prospects of potential losses grow greater. These people become easy pickings for the banks and insurers during bearish times.


We all know that “there is no such thing as a free lunch”. So how can such a sweet deal be possible? The answer lies within. Financial companies are intelligent enough to know, when the stock market comes tumbling down, it is a market discount. They can’t wait to sweep all the good stocks at costs of peanuts and make a huge windfall with the monies they receive from the capital guarantees sold to investors. And when such institutions earn a handsome profit, they return a meager interest back to the investors from whom the money came from. What a move! No wonder Warren Buffett remarked that “Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway.”


Does this mean that capital guarantees are simply nonsensical? Not at all. In the context of portfolio construction for investment risk management, they do have a part to play. Akin to most sports, there ought to be a presence of both defenders and strikers in order to win the game. Capital guarantees are the defenders when it comes to asset allocation. In JNP, capital guarantees are used regardless of the market state. Bullish and bearish times alike, they will always find a place in one’s portfolio. But they will be recommended not with the intention to make a quick profit from investors’ fears, but for sound asset allocation.


Look out for next month’s edition where we explain which capital guaranteed product suits you best, depending on your financial situation.