Investment: Capital Guaranteed Funds - An Expensive Oxymoron By Gareth Milliams

I am going to commit heresy. I will be taken from whence I came, hung, drawn and quartered and my body parts sent to the most extreme corners of these three islands.

I do not nor have I ever felt that capital guaranteed funds were of benefit to anybody other than those who construct or sell them. They are a money making machine aimed at nervous investors.

This is also where I must make a concession. Nervous investors are people too and need somewhere to put their money. But, if they could see through their fear and get some perspective, this is what they would see:

1. The bank offering the guarantee (typically Barclays, Deutsche or another first tier brand) would not make the guarantee, if they felt that there was a cat in hell's chance of ever having to pay it out. Thus they do serious due diligence. Therefore, ultimately should the plan mature, the client is financing an internal bond issue for the bank to benefit from.

2. Because of the guarantee only between 50% and 65% of client money will be invested in the underlying fund.

3. If the guarantee is called upon (if the fund drops below the participation level for example), the investment will be converted to cash until the end of the 10-12 year fixed period. The client will then receive his original investment minus inflation.

4. But clients who invest only in the underlying fund, have the opportunity to remain vested and benefit from a comeback. How frustrating would it be, if your guaranteed fund was in cash, but the stand alone version of the exact same underlying asset was still trading and profitable?

Surely, if an institution considers an investment sound enough for it to back with its own paper and have its name marketed on the brochure, then that in itself is a certification of the quality of the underlying asset.

But the real benefit for the bank, is that they get to keep the bond element of the investment for themselves. This will (at least) equal the original total client contribution plus possibly any additional profit.

That's a massive return. But not for you.