These single premium investments do not allow for a change of investment strategy during the term of the investment. Unlike a portfolio type investment product, which allows the investor access to a number of managed funds, an investment bond has a fixed investment strategy. The investor has no ability to change the level of his/her exposure to this investment strategy. Think of it as having a fixed amount of capital invested in one fund, in which you stay for the period of the investment.
Many investment bonds offer a level of capital security, which may satisfy investors who have a low investment risk profile. Guaranteed Investment bonds have a set investment strategy, which will see a portion of the investors capital invested in fixed interest securities / deposits and the remainder in a tradable market asset, security or derivative.
When assessing the growth potential of capital guaranteed bonds, the greater the bond’s exposure to growth securities / assets (known as the participation rate), the greater the potential for gains. Also, the chosen indices or stocks should have good growth potential.
A tracker bond tracks a defined financial index or a number of financial indices, while offering investors a level of capital guarantee. Investors may be able to take a lower level of guarantee, in return for a greater exposure to the growth of the chosen index or indices. Important aspects to consider are –
- Investment term – as bonds are not all liquid and you may have to wait until maturity to access youyr initial capital.
- Level of Capital Guarantee – this is dependant on the individual investor’s appetite for risk
- The participation rate – This measures the level of participation the investor will have in the growth of the chosen financial indices or basket of stocks. The higher the participation rate, the greater the potential for gains.
- Is there a cap on gains? Some bonds place a cap or maximum limit on the amount of gains that an investor can make. Obviously the absence of a cap on gains would be preferabble.
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