17 January 2010

Unlocking the Mystery of Capital Protected Funds

Recently, there are a few capital protected funds being matured. However, most of the investors are not satisfy with the performances as promised when the fund was launched years ago. Is this the fault of investors who don’t understand it? Or, the fault of the product itself?

To make things worse, most of the investors are conservative in nature – older age group. If your mum or dad was one of them, make sure you finish this and explain to them.

Although Capital Protected Funds have been exist in Malaysia since early 20s, many investors still unclear about the structure of this type of fund. Is it safe as the name goes by? What is the return like? And, are there any terms and condition apply to it? Questions usually asked were answered below:

What are capital-protected unit trust funds?
· They are investments that promised to repay 100% of your capital, when held until maturity, which means your downside risk is protected.
· They do not guarantee returns to investors, but only promise to protect the capital invested.

So, what is the return likes?
· They allow investors to participate in the potential upside from the investments, by investing in risky assets like stocks, options or derivatives. Example, equities, bonds, commodities, indices and currencies.
· Normally, capital-protected funds are targeting 7%-10% annual return.
· Of course, they could give you zero return too. It all depends on the performance of underlying investment.

How is my capital being protected?
· It is protected by placing a large portion of capital in Zero Coupon Negotiable Instruments of Deposits (ZNIDs), which are money market instruments. ZNIDs carry a fixed interest rate, and aim to get back your 100% capital at maturity. (See Figure)
· These ZNIDs are issued and protected by Malaysian banks, with high-grade ratings.
· To make it even safer, fund manager would diversify the risks by sourcing ZNIDs issued by more than one bank.

Can I redeem before maturity? Any penalty?
· Yes, you can. But, you may not receive 100% of your initial capital. The value is based on the net asset value (NAV) at the time you redeem.
· Usually, a penalty fee of 0.5%-2% is imposed if you redeem before maturity.

Are you understood now? Be mindful if you come across capital-protected funds next time. Happy Investing.

1 comment:

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