Capital Protected Investments & Borrowing to Invest

by Chris Tetzner, Para-Planner

A scenario

So, your investments took a hit during the Global Financial Crisis. As a consequence, you may have had a margin call on your share portfolio, which resulted in you liquidating part of your share portfolio. You also may have needed to dive into your savings to repay the shortfall.

Now the markets are rising again, you’re keen to re-invest…minus the tribulations mentioned above. There is a way!!

How?

Capital Protected Investments have been available to Australian investors for some time now, with well known financial institutions such as Macquarie Bank, UBS and CBA offering them.

Today, we will look at the basics involved in investing in these types of products.

How do Capital Protected Investments work?

The investor agrees to borrow a sum of money, invest it for a set term and pay the ongoing interest costs along the way. At the end of this term, there are two possible outcomes:

  1. The investment value has risen, a portion of the proceeds are used to repay the loan and the investor keeps the remainder as profit.
  2. The investment has fallen in value and there is a shortfall, however due to the capital protected nature of the investment, there is no requirement by the investor to pay back the shortfall.

There are differing mechanisms the financial institution providing the products can use to protect the original amount invested, such as ‘Zero Coupon Bond’ and ‘Continuous Portfolio Protection Insurance,’ amongst others.

Whichever of these protections used, they generally work in the same way.

What are the advantages of Capital Protected Investments?

  • You are able to obtain leveraged exposure to the share market, without the requirement to invest your own funds upfront
  • The ATO allows potential tax deductions on some of the interest costs that the investor pays to finance the investment
  • The investor receives capital protection at maturity

What are the disadvantages of Capital Protected Investments?

  • Early redemption of the investment will result in a loss if it has fallen in value at the time the investor redeems
  • These types of investments usually have slightly higher fees than more traditional products
  • In the scenario where the capital protection comes into play at maturity, the investor will have forgone the ongoing costs of the investment along the way

When considering Capital Protected Investments, it’s essential you are up to speed on every aspect of the product.

If you want to learn more, or find out if Capital Protected Invesmtents are appropriate for your individual financial circumstances, contact a John Hopkins Financial Adviser who can go over what opportunities are available coming up to End of Financial Year.

 

 For more information, or to arrange an appointment with a John Hopkins Financial Adviser, please contact our Client Liaison Officer on 1300 726 082 or click here. 
 

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