In times of miserable returns‚ like now, doesn’t it make sense to invest in a vehicle that guarantees returns? Not before you’ve looked at what is guaranteed and how, and what it costs to extricate yourself from the product.
Leon Greyling, head of business development at Investment Solutions, offers advice on these seemingly attractive products. He says that if you stick to guaranteed investments over the long term, your returns will be lower than in the equity market.
The obvious guaranteed return instrument is the fixed deposit, in theory a low-risk investment, where you are assured of getting your money from the bank at an agreed time. Tell that to someone who took out a fixed deposit with Saambou two years ago.
One way of offering guaranteed returns is for an investment house to use low-risk money market instruments, which include fixed deposits. To deal with the Saambou problem, another method of securing guarantees is to have an insurance house underwrite the investment. If the bank goes bust, it’ll pay you from reserves.
The investments will normally guarantee your capital, any contribution you make during the life of the investment and a bonus. What the fund managers do is “smooth” the bonus over time, shaving some cream from the top in good times and shoring you up in a bear market.
A traditional guarantee will normally secure capital, your contribution and a bonus split into a vested and non-vested component. The vested part can, in specified years, be recalled by the investor in hard times.
The last of the common forms of guarantee are structured investments. These give exposure to equity markets but are underwritten by a bank, and guarantee a return ranging between what you have put in and capped stock-market growth.
For the nervous, ageing and conservative, guaranteed investments have a role. But, as Greyling points out, “in investments, as in life, nothing is guaranteed”.