Build your personal Capital Guarantee Structured Deposits

Capital Guarantee Structured Deposits are financial products being offered by major financial institutions across the globe. The basic concept is that if you buy and hold on to a capital guarantee structured deposit until maturity, you will definitely get back all your initial capital. In addition, part of the deposit money is tied to an investment product of higher yield, such as equities and indices. So that if the underlying investment products perform well, there is a chance of obtaining higher return from your initial deposits, when compared to those offered by a vanilla bank account.

Before you invest

All these sounds too good to be true. Capital is safe, higher interest pay out than normal bank deposits. But what are the things that you should know?

• Do make sure that you have full understanding of the product you are investing. Look out for the fine prints in any investment contracts
• Ask about the risk involved. All investment products comes with certain risk. Make sure you understand them and is able to accept the risk
• Find out about any fees involved. They may come in the form of transaction, management, early withdrawal or terminating fees.
• Make sure that you do not need that amount of money for that few years until the product matures. Normally, early redemption of the product will result in loss of capital (partially or in the worst case, everything)

After considering the above points, go ahead and make the investment if you are comfortable.

Building your own

Financial institutions will try to make money in all products that they sell and Capital Guarantee Structured Deposits are no exception. One way to save on this fee is to build your own Capital Guarantee Structured Deposits. I will try to show a simple illustration of how to do it. Once you get the idea, feel free to vary it accordingly to suit your risk profile level.

Lets take the scenario where you have $10,000 to invest and is looking at the maturity of 10 years.

1. You will first need to find out the interest rate of a 10 year low risk bond. By low risk, it will mean something like AAA rated bonds by the credit rating agencies. This will ensure that the risk of default is very low and you will get back all your money in 10 years.
2.  After this, take a look at the coupon rate being offered by the bond and do some quick calculation. Assuming a rate of 5% per year, you can use $7,000 to buy the bond. This means that the coupon is $350 per year and $3,500 for 10 years. Effectively, after 10 years, you will get back $10,500 and this is $500 more than your original sum of $10,000
3. With the remaining $3,000, invest it in a higher risk investment products, such as ETF. Any sum that you make in this investment product will be the bonus interest from your very own Capital Guarantee Structured Deposit. In the unlikely scenario that you lose all $3,000 in 10 years, you will still have your original amount back, as shown in point 2.

Lets get started!

The concept behind building your personal Capital Guarantee Structured Deposit is very simple. You can even scale the amount accordingly to what you have available for investment. But if you are doing on your own, do choose your risk free bond (for the bulk of your money) and the higher risk investment product (for the small part of your money) wisely. It will affect what you get back after the product matures.