Imagine investing in a product that guarantees you’ll get back at least your initial investment, no matter what happens in the market. That’s exactly what a guaranteed investment fund (GIF) promises, combining the security of a safety net with the potential of market returns.
Let’s dive in…
Table of Content
- What Is Guaranteed Investment Income?
- How Guaranteed Investment Fund Works
- Concepts of Guaranteed Investment Funds
- Conclusion
What Is Guaranteed Investment Income?
Insurance companies offer a type of investment product called guaranteed investment income, which lets customers invest in bonds, stocks, and/or index funds The promise is that the initial investment amount, or the fund’s predefined minimum value, will be accessible when the fund matures or the client passes away. For this service, insurance companies usually charge up to 1% of the annual investment amount.
While guaranteed investment income offers security, some businesses may prefer more flexible options like revenue-based financing to raise capital without losing equity.
How Guaranteed Investment Fund Works
Resetting the Guarantee: Certain guaranteed investment income funds additionally permit investors to reset the guaranteed amount for predetermined periods. This enables investors who realize significant capital protection to lock in larger amounts.
Example: Suppose, for instance, that a close-to-retirement investor put $500,000 into this fund, and that after a spectacular bull run, their investment increases to $585,000 in a single year. The investor has now guaranteed that they will receive $585,000. At the very least, by resetting the guarantee at this point.
For a deeper dive into the mechanics, refer to RBC Wealth Management’s article.
Key Takeaways
- Investment Vehicle: Insurance companies offer guaranteed investment income as a means of making investments.
- Variety of Funds: Investors have a variety of options to choose from, ranging from traditional investments to personal loans offered by companies like Mariner Finance.
- Security of Capital: Investment funds that provide investment guarantees pledge that, at a given point in time, all or a portion of the money invested will be secure.
Concepts of Guaranteed Investment Funds
Guaranteed investment funds, as the name implies, offer an assurance that all or a portion of the money invested will be secure until a specific future date.
Additionally, there are situations where virtually certain returns are possible.
Guaranteed Maturity Date
A future date on which the net worth (guaranteed net asset value) of every share of the fund is assured to reach a particular level. The guarantee will only be available to shareholders who hold their investment as long as the maturity date.
- Risk: Significant losses might occur if an offer to redeem is made before that time.
Guarantor
A company that promises to supply the necessary funds to guarantee that the investor retains their initial investment if the guaranteed investment fund fails to produce net asset value.
Types of Guarantee:
- External Guarantee: If the money is delivered to the shareholder.
- Internal Guarantee: If the money is delivered directly to the fund.
For a comparison between guaranteed investment funds and mutual funds, see CIBC’s comparison.
Guaranteed Fixed Yield
These guarantees set and planned returns (as stated in the brochures in terms of annual interest, APR) in addition to securing starting capital for the guarantee’s due date.
Liquidity Windows
In other words, certain guaranteed funds have set dates by which a shareholder can receive a full or partial redemption without having to pay redemption fees.
- Notice Periods: You have to adhere to the notice periods specified in the brochure to do this.
- Risk: The guarantee is not applicable and losses may occur because these redemptions are carried out by the net asset value on that particular day.
Guaranteed Variable Yield
On the date of guarantee maturity, these only provide an initial investment guarantee. Additionally, they provide the opportunity to earn returns correlated with the performance of several financial assets or indicators (using intricate calculation formulas).
- Risk: Investors need to be aware that they might not receive any returns if the underlying instruments do not perform as expected.
For more information on the safety and risks of these funds, visit Morningstar’s article.
Conclusion
A guaranteed investment fund offers a safe method of capital growth with the guarantee of protection. Whether you’re nearing retirement or seeking a stable investment option, these funds offer the security of knowing your initial investment is safeguarded. However, it’s essential to understand the specific terms, risks, and guarantees associated with these funds to make informed decisions. You can confidently reach your financial objectives by selecting the appropriate guaranteed investment fund.
Before committing to any investment, it’s wise to ask the right questions, much like those outlined in our guide on Top 10 Questions to Ask Debt Consolidation Company.
