Tan Kin Lian's Blog: Capital protected product

Sunday, October 05, 2008

Capital protected product

Here is an explanation from the London stock exchange:
http://www.londonstockexchange.com/en-gb/pricesnews/prices/structuredproducts/proddescriptions/capprotect.htm

Basically, the issuer of the product buys a zero coupon bond to provide the redemption of the capital at maturity date and uses the interest to buy an option.

If the option works well, it can give an attractive return. If the market moves in the wrong direction, the option is useless and the investor loses the option money entirely.

This product has a disadvantage. The issuer is likely to take away a large part of the investment (5% to 10%) as marketing expenses and profit. This leaves very little money to buy the option. This is why most capital protected product gives poor return over the past years.

For a capital guaranteed product, an additional fee is taken away to pay the bank that provides the capital guarantee. This reduces the return to the investor further.

Be aware about capital protected product. It is good for marketing, but is actually quite useless. Read this opinion:
http://www.wrenresearch.com.au/advisers/factsheets/060413/index-b.htm

12 comments:

Anonymous said...: Most consumers would assume that capital protected is the same as capital guaranteed!; October 05, 2008 12:46 PM
ym said...: the toxic minibonds/highnotes is the total opposite of the example shown here..

for the case of the minibonds/highnotes, investors bought a bond (actually more like CDO) and shorted/solded an option and in return gets the option premium (ie as extra interest)..

the loss from the option can be catastrophic when an extreme credit event happens.. ppl can view it as paying out insurance claims or 4D winnings when an extreme event happens..; October 05, 2008 2:56 PM
Anonymous said...: These are the by-products that were introduced after the last Asian Financial Crisis. Not sure what new products will be introduced after this American Financial Crisis. Buyer Beware!; October 05, 2008 3:26 PM
hongjun said...: I walked past AMK hub this afternoon. There is this NTUC Income booth outside AMK hub near Cheers convenience store. They are promoting Capital Guaranteed "products".

I overheard an auntie told the sales people there is no such thing as guaranteed. There are too many cases of people losing savings from the papers.

It appears to me that the confidence level of the public could be at one of their all time low.

hongjun; October 05, 2008 3:26 PM
Wealth Journey said...: Even for capital guaranteed products, it is still subjected to the credit/default risk of the guarantor.; October 05, 2008 6:36 PM
nhyone said...: I agree with the linked article that whoever coined the phrase 'capital protected' should be given a marketing achievement award.

It must have fooled a great deal of people. After all, what's there to worry if it's captial protected?

In the future, the method to achieve capital protection should be highlighted prominmently! This should be done even for FDs.; October 05, 2008 7:26 PM
Anonymous said...: Loh Hon Chun,
the product the ntuc agents promote is Growth. It is capital guaranteed but NOT guaranteed return. Like all capital guaranteed products the return is poor, it is miserable and has a long lock in. Unfortunately some ntuc agents misrepresented the product.; October 05, 2008 8:56 PM
Unknown said...: Hi Anonymous @8:56pm,

In fact Growth is a not a bad product if you are looking for capital guaranteed and wealth preservation over time vs inflation. In fact, it has a shorter period of lock in than most of the savings plan in the market. The shortest period you can find for this plan is 5 years. But of course, this kind of product only forms a stability of the whole wealth portfolio. For more growth you will still need to invest, but not structured product please...; October 05, 2008 11:03 PM
Anonymous said...: My mum bought many Growth plan since 10 over years ago, she told me some 5% plus, some 4% plus; returns better than my dad and sisters who invested in unit trust and stocks.; October 05, 2008 11:28 PM
Anonymous said...: I am confused...
Can anyone explain to me what is capital protected, Capital gauranteed, principal protected and principal gauranteed???
thanks.; October 06, 2008 11:01 AM
Richard Goh said...: Mr. Tan,

I hope you can continue to educate our poor, innocent investors with information like this.

The average investor is a layman without any experience in financial products or knowledge of the terminology used.

Unfortunately, we get wiser after we have lost out first.; October 08, 2008 4:20 PM
Richard Goh said...: Mr Tan,

Please continue to educate the poor, innocent investors who have no experience in financial products or knowledge of the terminology used.

We fall prey easily when investing in products with hidden agenda and will realise too late when we have been taken for a ride.

Financial consultants who sell their products are careful to disseminate only general information which may not reflect the truth.; October 08, 2008 4:32 PM