Monday March 26, 2007
AS an investor, you may have come across a Capital Guaranteed Fund. But do you know what it is?
Commonly, a Capital Guaranteed Fund (CGF) is a unit trust fund that is structured to provide investors with returns while guaranteeing investors against any capital losses at the maturity period of the fund. The fund tends to have a limited lifespan, usually between three and five years.
The main element of the CGF is its capital preservation feature. A CGF is usually guaranteed by guarantors who are required by the Securities Commission to be licensed financial institutions like banks or merchant banks with good credit ratings. These banks will receive guarantor fees in exchange for their bank guarantees. These fees are borne by the management company.
How does it work?
A CGF typically consists of three phases: Offering phase – This is a period of several weeks when investors can buy units in the fund
Guarantee phase – This is a period of the fund lifespan when the fund will be invested and reinvested by the manager of the CGF. Should an investor exit the CGF during this period, the investor may be entitled to investment returns (if any) accumulated up to that point, but will not be entitled to the capital guarantee if the CGF suffers capital losses at the time of exit. The capital guarantee feature is, in most cases, applicable only to investors that hold his/her investment until the fund’s maturity date.
Post-guarantee phase – Upon maturity, the fund will be liquidated and investors’ capital will be returned, and any income from the fund will be distributed to investors. Should there be any shortfall between the initial capital invested and the asset value at maturity date, the guarantor will cover the shortfall in the investors’ capital.
The guarantee factor: Let’s assume that you bought units in a CGF at an initial selling price of 50 sen per unit. The fund maturity period is three years. You invested RM5,000 in exchange for 10,000 CGF units. If upon maturity of the fund, the net asset value fell to 40 sen per unit, you will receive 50 sen per unit, instead of 40 sen per unit, as your capital is guaranteed, plus any income the fund had received during the tenure of the fund.
The fund’s guarantor will pay for the 10 sen difference. In this case, you will receive the RM5,000 initially invested in the CGF from the 10,000 CGF units that you hold. Without the guarantee, you would have suffered a capital loss of RM1,000 and would only receive RM4,000 (excluding fees and charges). However, if on the maturity date the net asset value per unit is 60 sen, the guarantee will not be triggered and you will stand to gain from the capital gain of 10 sen per unit. In this case, you will receive 60 sen per unit, rather than 50 sen, plus any income the fund had received during the fund’s tenure. You will receive RM6,000 at maturity for 10,000 CGF units (excluding fees and charges). Your profit is RM1,000 plus the income distributed by the fund.
The guarantee is only applicable for units that are held until the maturity date, in this example, three years. If the units are redeemed before the maturity date, the guarantee is not applicable and investors’ capital will not be guaranteed and will be exposed to potential capital loss . For some CGF, a penalty will be imposed for early redemption. You must consider all these factors to ensure that investing in the CGF is consistent with your investment plan.
Capital preservation is the main feature of CGF, but it should not be the sole basis for making your decision to invest in the product. Like any other investment products, CGF comes with investment risks, too. Therefore, you should review your financial goals first and subsequently evaluate the CGF offer thoroughly, to ensure that both are consistent before you invest. You should also review the fees structure of the CGF imposed by the fund’s manager, because these fees could affect your investment returns. Never invest without reading the prospectus first.