How Soft Capital Protected Investments work
Q AI have excess money in my business and have been advised to invest 50K in Soft Capital Protected Investments – Can you explain how this works? SOFT Capital Protected Investments are also known as ‘Auto-Callable Bonds’ or ‘Kick – Out Bonds’. They are becoming increasingly prevalent in the Irish Market and seek to offer equity market like returns with some degree of capital protection. They should be seen as a means to gain access to equity markets with some degree of capital protection built into the product structure. They are not an alternative to deposits. Here’s example of how they work:
You have €50,000 to invest in a kick out bond fund, you are looking at a 3-year investment term but possibly as short as 1 year
Year 1: The Kick out Bond Tracks the value of a stock Index. If after 1 year the index value is at or above 100% of the starting value, then the investment bond will cease and the original investment amount of 50K plus a fixed 8% return is paid out to you. If however, after 1 year the Index is not priced at or above 100% of the starting level then the investment continues for another 12 months.
Year 2: If after 2 years, the Index is at or above 100% of the starting value, then the investment bond will cease and the original investment amount. If however, after 2 years the Index is not priced at or above 100% of the starting level in Year 1 then the investment continues for another 12 months.
Year 3: If after 3 years, the Index is at or above 100% of the starting value, then the investment bond will cease and the original investment amount of 50K plus 24% return is paid out to you. If however, after 3 years the Index is not priced at or above 100% of the starting value in Year 1 then you will not get any investment growth at all. You will only receive a return of your initial investment value of 50K and this return of initial capital is also dependent on the following provision:
Soft Capital Protection Provision – If the Index has not fallen more than 40% of is starting price ( 40% being the terms of this particular bond) Let’s look at the following possible outcome where the value of the S&P 500 Index has fallen:
- The Index has fallen by 10%, that’s fine John gets his €50,000 back as the terms of the soft capital protection allow for a 40% drop.
- The Index has fallen by 30%, that’s still fine and John gets his €50,000 back as the terms of the soft capital protection allow for a 40% drop.
- The Index has fallen by 60%, John suffers a corresponding % loss on his investment as the soft capital protection barrier of 40% has been breached. SUMMARY
1) They offer the potential for very attractive investment returns similar to equities
2) They allow for significant falls in the value of the index value before investors are impacted
3) If they do fall heavily, for example by more than 40% based on the above example, investors will suffer heavy losses.
4) They can form part of an investment portfolio but should only ever be a used as complementary fund in a larger more conservative investment strategy.
For more information on how to get your money to perform better, contact Jim Doyle on 053 9170507 or jim@rda.ie