Protected Funds: Definition, How They Work, and Examples
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Summary:
A protected fund is a type of mutual fund that guarantees to return a portion of the initial investment along with some capital gain to the investor after a specified period. While offering exposure to market returns, these funds prioritize the safety of the principal investment.
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What is a protected fund? Example & how it’s used
A protected fund is a specialized type of mutual fund that provides investors with a level of principal protection, ensuring the return of at least a portion of their initial investment over a predetermined period. This article delves into the workings of protected funds, their construction, and considerations for potential investors.
How a protected fund works
Protected funds typically maintain a balanced portfolio comprising both fixed-income securities and equities. The fixed-income component acts as a safeguard for the principal investment, while the equity portion aims to generate additional returns. To ensure the protection of the principal, portfolio managers often procure insurance policies, with associated costs passed on to investors.
The return of the initial investment, alongside any accrued capital gains, is contingent upon holding the fund until the end of the agreed-upon guarantee period. Should an investor choose to liquidate their investment prematurely, they may incur losses and early redemption fees.
Examples of protected fund construction
For instance, Zurich Life offers a range of protected funds, such as:
- The Protected 70 Fund: invests up to 90% of assets in equities, with a protected price set at 70% of the highest unit price during the investment period.
- The Protected 80 Fund: invests up to 70% of assets in equities, with a protected price set at 80% of the highest unit price during the investment period.
Frequently asked questions
What is the guarantee period for protected funds?
Protected funds typically specify a predetermined guarantee period during which the principal investment is safeguarded. This period varies depending on the fund and the terms outlined by the provider.
What happens if I sell my investment before the guarantee period ends?
If an investor chooses to sell their investment before the guarantee period elapses, they may incur losses and early redemption fees. Additionally, they risk forfeiting the principal protection and any accrued capital gains.
Are protected funds suitable for short-term investment goals?
Protected funds are generally more aligned with medium to long-term investment objectives. Investing in these funds necessitates a commitment to holding the investment until the end of the guarantee period to fully benefit from the principal protection.
Key takeaways
- A protected fund guarantees to return a portion of the initial investment along with potential capital gains.
- Investors must hold the fund until the end of the guarantee period to benefit from principal protection.
- Considerations include higher expense ratios, early redemption penalties, and the potential for underperformance.
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