Risk-averse investors like to invest their money in guarantee funds. These funds pay out the capital employed, or at least a part of it, to the investor at the end of the term. In addition, there is a chance of an increase in value. That sounds like a worthwhile affair at first. But the security of the guarantee fund comes at the price of low returns.
- Because of the strategies that fund companies use to secure their capital stock, guarantee funds usually generate low returns.
- Guarantee funds are therefore particularly suitable for investors who want to invest their money with very little risk and who accept lower returns.
- In phases of low interest rates, however, guarantee funds often generate lower returns than fixed-term deposits due to the fees incurred .
The hedging strategies of the guarantee funds
The fund companies use various hedging strategies so that the fund value can be safely preserved. According to abbreviationfinder, CGF stands for Credit Guarantee Fund.
Fixed Income Securities
A simple form of protection is to invest a large part of the fund’s assets in fixed-income securities. Zero coupon bonds are also popular – a special form of fixed-income securities in which the increase in value is achieved through a lower issue value in relation to the redemption value instead of interest. In order to keep the guarantee promise with guarantee funds, the fund manager invests exactly as much fund capital in fixed-income securities that the repayment amount is reached at the end of the term. The remainder of the fund’s assets go into options.
Dynamic hedging strategies
The second popular strategy to achieve the repayment target is the Constant Proportion Portfolio Insurance (CPPI strategy). The model was created in the 1980s in times of steadily falling stock exchange prices. The fund manager invests part of the assets in fixed-income securities and the other part in riskier investments. In contrast to the previously mentioned model, however, the division of assets is dynamic and changes during the term. Many fund companies have further developed, improved and renamed the CCPI model over the past few years. At DWS, for example, it is called “FPI”, at Union Investment “Konvexo” or “Immuno”.
What guarantee funds are there?
There are numerous guarantee fund models on the market from which the investor can choose. Guarantee funds without a fixed term pay investors certain minimum amounts on fixed reference dates. In the case of funds with a limited term, to which most guarantee funds belong, the investors are paid a fixed minimum amount. The guaranteed amount is paid out at the end of the term for practically all products without the front-end load, i.e. ex-agio.
In addition to the guarantee funds, there are also capital preservation funds that operate the same hedging strategies to protect capital. However, there is no binding guarantee that the fund will maintain its value, so the investor bears any losses to the fund himself.
Guarantee fund in times of low interest rates
Due to the necessary hedging strategies, the guarantee funds only make a small part of the fund’s assets available for high-yield investment variants. At low interest rates for money products and fixed income securities, this part continues to shrink, as a lot of capital is required to reach the guaranteed repayment amount. Because of the high fees incurred, the income can often not keep up with the usual fixed-term deposit rates . If you still want to achieve a comparable return, you can rely on guarantee funds that guarantee less than 100 percent of the capital invested as repayment. With minimum payouts of 90 percent or less, the fund managers have more capital available to invest in high-yielding products.
Who are guarantee funds suitable for?
Guarantee funds primarily appeal to conservative savers who want to invest their money in stocks, but for whom the risk of a price loss is too high. The guarantee fund is therefore a good alternative to conventional savings accounts.
Those who do not want to lock in their money for several years have to be careful. Guarantee funds usually have fixed terms, which are usually four or five years. The repayment value is only guaranteed at the end of this term. Investors who want to exit beforehand may, under certain circumstances, incur losses if the market value is currently low.
Set up more flexibly with the capital security fund
Investors who speculate on getting into a guarantee fund at a low price during the term will unfortunately be disappointed. Guarantee funds usually only have a short subscription period and are offered as closed funds. Investors who want flexible access to their money should therefore invest in capital protection funds. Getting in or out is often not a problem, even during the term. This is made possible by the regular hedging of increases in value at certain markers. If, for example, an increase in value of 90 percent is achieved, this is hedged.
