A few weeks ago, I wrote about risk and return, how the markets reward you for taking risk by giving you a great expected return. This week, I am going to write about a type of investment that is marketing as saying you can enjoy equity type returns (high risk) while taking deposit type risk (low risk). These are called Tracker Bonds or Structured Products.
You give your money to the product promoter who will invest the money on your behalf. They will track a selection of stocks or an indices of shares or bonds. The term of the investment is usually 5-6 years.
At the end of the term, if the selected stocks are worth more than when you started, you make a profit. If it is lower, you get your money back. There are variations of this, where there are limits on the amount of the profit you receive or only a percentage of your money is guaranteed.
In essence, your money is split three ways:
Despite being marketed as low risk investments, there are lots of risks to consider:
Tracker Bonds are incredibly complex investment instruments. There may be limits on how much you may make and how much of your money is guaranteed. If you do not fully understand them, do not invest in them.
…and remember, you cannot earn equity sized returns without taking equity sized risks.
If you have any questions, please contact me directly at firstname.lastname@example.org