Understanding capital-protected investments

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Capital-guaranteed and capital-protected investments sound safe and straightforward.

After all they carry the words: protected or guaranteed. But before you invest you need to know that they are structured, complex investment products, not bank deposits, warns the regulator, the Australian Securities and Investments Commission (ASIC).

As these products grow in popularity with investors seeking a safe haven to preserve their money, ASIC has reviewed 64 product disclosure statements for capital-guaranteed and capital-protected products.

It has released its findings in a consumer guide called 10 things to think about before you invest in capital-guaranteed or protected products. See fido.gov.au.

It says that even though banks and other regulated deposit-taking institutions may offer these investments, if you invest in one you don't have the same security or rights that apply when you put your money into a savings account.

The guarantee or protection is only as good as whoever stands behind it. Find out which company is offering the guarantee and protection. Always ask: what is that company's financial situation?

ASIC says people should understand that capital-protected and guaranteed are more expensive than simpler investment products because of the extra cost of protection or guarantee. This doesn't mean that the returns will be higher, especially over the medium to long term.

ASIC says the fees need to be weighed up with the benefits of guarantees or protection. Some products limit the capital growth you are entitled to if the investment goes well. Take inflation into account when looking at the promised returns. Often these products don't, says ASIC.

For example, if you invest $100,000 today for five years, you would want to get $115,927 back at the end of five years to ensure that your money has not been diminished by inflation - assuming a rate of 3%.

Look closely at the feature to "lock in" investment gains that some capital-guaranteed and protected products offer, says ASIC. Check the disclosure statement to see if there are knockout events that can reduce or eliminate your investment earnings.

Also check whether the product allows the issuer the discretion to terminate the investment early if certain events occur.

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Susan has been a finance journalist for more than 30 years, beginning at the Australian Financial Review before moving to the Sydney Morning Herald. She edited a superannuation magazine, Superfunds, for the Association of Superannuation Funds of Australia, and writes regularly on superannuation and managed funds. She's also author of the best-selling book Women and Money.