Pune : A capital guarantee fund is an investment in which the investor’s principal is shielded from any losses. With a capital guarantee fund, any losses experienced by the underlying investments are instead absorbed by the fund company.
Investing during market downturn can be a sensible step because after that when the market picks up, you can get good returns. One of the best options available for investment in the current market conditions is the Retirement Based Capital Guarantee Solution Plan – a mix of ULIP and guaranteed return products. Under such plan, according to the policy terms and conditions, 100% of the premium you pay during the policy period is guaranteed.
This means that no matter how the market falls, but the premium paid by you will be 100 percent safe. Apart from this, you also get returns during the boom in the market while your capital is also completely safe. In this plan, 30 percent of the money you invest is invested in guaranteed return products and 70 percent goes into ULIPs.
This means that no matter how the market falls, but the premium paid by you will be 100 percent safe. Apart from this, you also get returns during the boom in the market while your capital is also completely safe. In the plans currently available in the market, 30 percent of the money you invest is invested in guaranteed return products and 70 percent goes into ULIPs.
The benefit from a plan depends on the remaining years for your retirement age. The more years left for retirement, the higher your income will be because more money will be invested in ULIPs. But if you assume that you want to retire early, such as at the age of 40-45, then the majority of your investment will go to guaranteed return products and the income will be less.
These funds therefore tend to invest the majority of their available capital in very conservative securities to help minimize the likelihood of losses, a move that also limits return.
A capital guarantee fund may also utilize derivatives such as options contracts to guarantee against losses, which can also reduce returns due to the cost of purchasing the options.
For instance, one strategy that can be used is to invest in very highly-rated zero-coupon corporate bonds maturing in 10 years. These bonds, since they do not pay regular interest, are sold at a discount and gain value over time, ultimately maturing at face (par) value. Say the face value on these bonds are Rs.1,000 and are issued at a discount in the market at Rs.915 per bond. If the fund has 10 million to invest, it can buy 915x bonds for 9,150,000, which will mature to the initial principal amount of 10 million in 10 year’s time. The remaining 850,000 can be invested any way the fund sees fit in order to generate returns. Because this speculative amount remaining only represents 8.5% of the fund’s available capital, fund managers tend to use highly leveraged, but limited downside securities such as options or other derivatives.