Capital-Protected Products
May require investing loans

Investing loans are commonly required to be used with capital-protected products. These products provide a safe investing exposure to equity markets with built in cover if the markets turn sour.

Capital-protected products may be particularly useful in markets such as emerging markets that are likely to be volatile.

The common characteristics of this type of investment are ...

• Capital-protected products guarantee your money back - minus fees or loan interest
• Most allow you to borrow up to 100 per cent of the investment, and some insist on it
• You have to keep your money invested for a minimum period for the protection to apply
• When you borrow to invest, the interest is generally tax deductible
• Some products are harder to exit from than others

Part of the reason for the phenomonal growth in these products is the tax offsets the products offer when 100 per cent of the investment may be a loan.

While the tax offset may be an add-on benefit, the value of the investment should be the primary consideration.

An appeal of the capital protection is that it allows investors to consider diverse asset classes that they may not have thought about otherwise, or that they might not have been previously comfortable with.

Lenders have lists of approved stocks and funds that investors can buy into with their loans.

The best time to use these products may be after a prolonged period of strong performance when there is greater potential of volatility ahead rather than after markets have experienced a large fall.

Of course, if the product requires a long term investing approach of five or more years, one may question the need for the protection as time erodes investment risk.

So, tax benefits aside, I would question whether these products represent good long term financial investments when the additional premium to be paid for the capital protection significantly dilutes any returns that may accrue.

Return from Investing Loans to Leveraging