Guaranteed Equity Bonds

Every so often the financial services marketplace generates new products. In spite of what you may think, this isn’t done exclusively to confuse the public! The intention is to find new ways of offering people opportunities to maximise their return on investment and, it must be admitted, the provider’s profits. Good examples of these types of products are the guaranteed equity bonds – sometimes referred to as guaranteed equity bonds. Once again, there is no such thing as a single definition of guaranteed equity bonds. Different providers will offer different individual products that they will call a guaranteed equity bond. It is necessary to look at them on a case-by-case basis to assess their pros-and-cons but you’ll probably find that most of them share certain characteristics; they offer a variable rate of return on your capital investment, they are linked in one form or another to the stock market, and your capital should be safe and guaranteed to be protected.

So, how do guaranteed equity bonds work? They all start with the assumption that you have some capital and want to see it grow at above a typical savings account interest rate. The provider will take your money and use it to ‘do things with’ though in the case of most guaranteed equity bonds this may not be buying shares – in fact you may never know what the money is used for just as you don’t in many standard savings accounts. What they will tell you is that they will link the amount of growth your money will receive over a specified period of time to the average growth of the stock market / FTSE100. They may cite an average target earnings level that you may hope to achieve or some may offer a minimum target level based upon certain assumptions such as the markets not declining over a lengthy period. For guaranteed equity bonds, as with any investment product, it may be advisable to seek advice from a specialist finance provider – they can be found through the Internet.

Guaranteed Equity Bonds: The Facts

• Growth in the stock market can be negative over a period of time as well as positive. In other words, things go down as well as up and you could see your actually return being far less than you anticipated if the market has an extended down phase;
• Although your capital is notionally safe, if you invest 100 pounds in guaranteed equity bonds over a two-year period and only succeed in getting that back, then taking into account inflation your original 100 pounds is going to be worth less than it was when you invested it;
• Considering that guaranteed equity bonds may tie up your money for a considerable period of time and in the end generate a lower growth rate than you expected, you could end up with a return that is less than you could have achieved with a guaranteed return savings account;
• Guaranteed equity bonds are not quite playing the markets because your capital is safe. Equally they offer a little adrenalin because you won?t be able to be entirely sure how much if any return you?re going to get at the end of the period. If you like a little unpredictability in your life but without much risk then they may be for you;
• It may be worth keeping in mind though, that allowing for inflation you could end up with notional loss.