When you are told that your investments are protected, secured and guaranteed, can you really tell the difference? Do you know what are “Principle Protected”, “Principle Guaranteed” and “Guaranteed Return”? If you are confused, there is nothing to be ashamed of. Let me try and break it down for you.
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Principle protected funds are as the name suggests protected by secured backing. The type of secured backing involved depends on how each fund is structured. Some may be backed by investment grade (eg. AAA, AA, etc.) bonds while others may be backed by put options. As you probably know by now, the investment grading may be flawed while the put options are susceptible to market volatility.
Principle guaranteed funds have secure third parties like banks to provide a 100% guarantee of the principle sum. Of course if the guarantor folds, the guarantee also disappears. Therefore it is imminent to get a strong guarantor’s guarantee for the principle guaranteed fund to be truly secure.
Guaranteed return is, as its name suggests, a guaranteed amount of return on your investments. However, many people mistakenly assume that the guaranteed amount involves the principle.
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Please read the fine print of the terms and conditions carefully to better understand the risk you are undertaking. If you are interested in getting a better understanding of the financial terms commonly used nowadays, you can read this Dictionary of Financial Terms.
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