Tan Kin Lian's Blog: Principal Protected Investments

Monday, May 24, 2010

Principal Protected Investments

Read this article. These investments are not safe and do not offer an attractive yield.

My comment
My wife and daughter were sold several of these products during the past decade. They were told that they are "safe" and have the potential to earn a good return, if ........... In all cases, they just got back their capital after waiting for five years and lose the interest that could have been earned.

Avoid all structured products. Read the tips in my book, Practical Guide on Financial Planning.

6 comments:

Anonymous said...: Any investment that is capital guaranteed is a risky investment.
Example of this case. Did the investment meet both mother and daughter' expectation? No... so isn't it risky?; May 24, 2010 9:21 AM
Anonymous said...: Principal protected and principal guaranteed are just structured products. They are fundamentally casino products disguised as banking/insurance/investment products.

They work based on statistical models and probabilities based on historical financial occurrences and outcomes. Of course the product developer would have skewed the underlying model heavily in favour of the bank/insurer.

It is the same as packaging next year's gaming results of the Turf Club and the 2 IRs into an "investment" product.

Btw, principal protected is NOT the same as principal guaranteed -- you can still lose part of your principal even if you hold till maturity. Becoz the underlying "safe" fixed-income portion is structured to cover maybe 80% to 90% of the principal, and they use more to gamble with riskier derivatives like swaps, options, futures, credit-linked/asset-linked/equity-linked obligations etc.

That's why for "protected" the yields are higher than for "guaranteed" which the salesman will use to entice unsuspecting customers.

Anyway even for so-called "guaranteed", you have to ask yourself -- guaranteed by who? This is counterparty risk. The guarantor is usually a temporary company/entity setup by the developer bank, used to issue the structured products. Even if the underlying investment instruments still have some value, but if the counterparty is kaput, the structured products is likely to kaput as well.

Oh btw, for the extremely rich and financially savvy as well as having big-shot lawyers at their side, they often get investment banks to structure similar products for themselves. But the odds are much fairer, and there is greater protection and safety mechanism in place. Structured products were originally meant for such investors and were custom-designed for individuals; each investment usually at least US$5M and above.

Those mass-produced by banks for retail are mostly to churn customers and profits.; May 24, 2010 10:20 AM
CreateWealth8888 said...: If some fellows sell you some Capital Protected Investment product, you better walk away quickly.

Capital Protected may mean that fellow takes 100% of your capital and likely to invest in Zero-coupon bond.

Zero-coupon bond is sold at a deep discount and redeem it a full face value when it matures and then that fellow uses the discounted amount to speculate in some high risk investment products.

If the high risk investment returns positive gains and that fellow may share a little of the gains with you.

See what happen -

That fellow win, you may win some. That fellow didn't win, you didn't lose your capital. Good deal or not????

It is so easy to create your own Capital Protected investment product and why don't you DIY?; May 24, 2010 1:33 PM
Anonymous said...: Three years ago I bought a structured product from OCBC that is equity linked to three blue chips of the stock exchange, and believe me i regretted like hell, every three months I was given a 0.50% pa interest payment only, as the three stocks never trigger the event point where I could receive a higher payout.
Lamentably, i only received 0.50% p.a. up till now. Upon maturity next month, I would never invest in any structured products offered by banks ever. I feel being cheated all these three years.
It is as if the stock market never recovers from the financial tsunami of 2008/2009.; May 24, 2010 3:09 PM
Anonymous said...: All "Structured" products depend on some event happening or not happening(failed) to pay you something, so stay far far away if the Bank mentioned this word "Structured". Some of us did not even get any interest for the past 3 years becos the Banks structured it so well that you are the only loser even when equity market has risen.; May 24, 2010 8:22 PM
Anonymous said...: Why buy products equity linked to blue chips?

Buy the blue chips direct from the stock market. It is simple and transparent. Just get the timing right of course.; May 24, 2010 8:42 PM