To Capital Protect or Not?
Jul 01, 2022Capital protection (usually in a managed fund) is something I first heard about a few years ago. I always thought that the only capital protected accounts were in the bank, where the Government guaranteed up to $250,000.
However, there are companies that offer capital protected products that essentially combine a ‘safe’ and a ‘risky’ asset.
The issue is, if you’re capital is being “protected” to a certain amount, then the returns are typically lower, as you are basically “insuring” your capital. There is also no guarantee that the potential returns will even eventuate. So, they are by no means a “sure thing”. If you are being promised high returns with low risk, then alarm bells should start to go off in your head.
Having capital protection, low risk and high returns is a dream come true, with the operative word being “dream”.
You may think that even banks can fall and take all people’s money with them. However, the Australian Government guarantees deposits of up to $250,000 in Authorised Deposit-taking Institutions (ADIs), such as a bank, building society or credit union. The cap applies per person and per ADI.
Consequently, this is probably as close to capital protected as you are likely to find, and it’s a lot less risky than entering into a structured product, which you pay for, and may not provide the level of income or capital return that you’re after. In some cases, a term deposit may even return you a higher amount.
As with every investment, thoroughly check it out first, and if it seems too good to be true, then it usually is.
