Capital Protected is NOT Capital Guaranteed
Capital protected fund is often mistaken for capital guaranteed funds. Normally packaged as a structured note/deposit, it is very popular during bear markets. Like now!
Capital Guaranteed funds are guaranteed by the issuing financial institution, normally a bank or fund house. The risk lies in the solvency of the issuing financial institution. Capital Protected funds are not guaranteed. The issuing institution creates this protection through buying bonds. The added risk is linked to the bond issuers. Investors of the DBS Star Track fund would have learned about this risk.
This fund matures on 20th August 2008. In a fund update on 16 July 2008, it was stated that bond portfolio would not be able to provide the 100% capital protection which was part of its investment objectives. This is due to a investment in the bond of General Motors Acceptance Corporation (GMAC) which was a wholly owned subsidiary of General Motors (GM). GM was plagued by threats of insolvency and production cuts and GMAC had a high chance of being included in proceedings should GM be forced to file for bankruptcy in 2005. As the credit rating for GMAC was downgraded, the bond had to be replaced according to the CPF Investment Guidelines. This caused a trading loss and affected the capital protection. The replacement was carried out on 20th September 2005.
It is important to know what you are investing in. Financial advisers have a responsibility to disclose the information so that consumers can make informed decisions. The challenge to advisers is to provide ethical advice even when under the pressure of meeting sales targets. Advisers without sales targets will not face such pressures. Do not be pressured into a sale.
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