What are guaranteed investment funds

We explain how to generate returns on your money through guaranteed investment funds.

Guaranteed investment funds, as their name shows, guarantee that all or part of the invested capital will be secure for a specific date in the future. And in some cases there is the possibility for almost guaranteed returns.

Main concepts

  • Guarantee maturity date: a date in the future when all of the fund's shares are guaranteed to reach a specific net asset value (guaranteed net asset value). Only those shareholders that leave their investment until the maturity date will be entitled to the guarantee. If a redemption is made before that date then there could be great losses
  • Guarantor: Entity that commits to providing the funds required to ensure the investor keeps their initial investment if the guaranteed investment fund does not perform in a way that generates net asset value. When this amount is delivered directly to the fund then there is an internal guarantee; if the shareholder receives the amount then the guarantee is external.
  • Marketing period: period during which shares can be purchased from a guaranteed fund without paying subscription fees.
  • Liquidity windows: some guaranteed funds set predetermined dates when the shareholder can receive a total or partial redemption without paying redemption fees. To do this you must respect the notice periods stated in the brochure. Given that these redemptions are done according to the net asset value on that day, the guarantee is not applicable and losses may be incurred.
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Types of guaranteed investment funds

Using the guarantee's coverage we can see two types:

  • Guaranteed fixed income: these do more than ensure that starting capital is secure for the guarantee's maturity date, they also ensure set and predetermined returns (as stated in the brochure in terms of annual interest, APR).
  • Guaranteed variable yield: these only ensure starting investments on the guarantee's maturity date. They also offer the option to gain returns linked to how multiple financial assets or indicators perform (according to complex calculation formulas). Investors must take into account that if underlying instruments do not develop as expected then it is possible to not gain any returns.

What to do when the guarantee period ends

Shareholders must pay attention to the guarantee's maturity date (stated in the fund brochure and in the regular information sent out) seeing as that is the time to assess the situation and decide what the best option is.

In some instances, once the guarantee expires, these products establish or enter a new guaranteed term that entails significant changes to both their nature and characteristics. In other cases, the fund may stop being guaranteed and continue to work as normal with another investment policy.

And lastly, the fund may be absorbed through a fusion process for another fund once the guarantee period has run out.

Investors have the following options:

  • Not to accept the new conditions: in this case shareholders should exercise their right to separate, which allows them to recover their investment or transfer it to another fund without paying redemption fees during a limited period (at least a month). this period is stated in the letter sent by the company.
  • Remain as a shareholder in the fund: This option does not require any action, as if the investor does not demand repayment during the term provided to close the fund, it is understood that they agree with the new characteristics (or, where applicable, the characteristics of the absorbing fund) and wish to continue their investment. From that moment on the shareholder is subject to the new conditions (among which may include an applicable fee for redemption, for example).
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Matters that must be taken into account with these types of funds:

  • Guaranteed funds do not generally ensure investments at all times, rather only for a specific date: the guarantee's maturity date.
  • Not all funds guarantee returns. Before investing, check if the guaranteed investment fund offers fixed and secure returns, or if only the initial investment is guaranteed.
  • If you decide to invest in a guaranteed fund, you should invest during the marketing period and, if you wish to opt for repayment, you should only do so either in the term provided for after the guarantee has expired, or by taking advantage of the times where no repayment fee is charged (liquidity windows) during the life of the product.
  • Guaranteed funds usually charge high subscription and redemption fees during the guarantee. This is to stop shareholders from coming and going (with the exception being liquidity windows).
  • Redemptions carried out during a liquidity window do not benefit from the guarantee. Although they are exempt from redemption fees, they may lead to losses.
  • Don't forget to consult the product information brochure to find out about the marketing period, guarantee expiry date, return objective, fees, liquidity window, notice period, etc. It is important to read it before investing and once you become a shareholder.
  • It is important to carefully go over any notices sent by the company regarding the maturity date and the conditions for renewing the guarantee.
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