Below I attach both his question and my reply for everyone's easy reference.
My comments:Originally posted by hwh
What is the difference between capital protected and capital guaranteed? Capital protected is better?
Pls enlighten! Thx!
Capital Protected does NOT mean your principal (capital) is guaranteed at all.
Capital Protected ACTUALLY means you might lose part of your capital. However, the misconception that you have thinking that Capital Protected means your capital is protected and not subject to any risk of loss is very common.
I'm not surprised everyday many consumers leave a bank having invested money in a Capital Protected fund thinking their capital is safe and secure.
On the other hand Capital Guarantee as the name implies, means your Capital is Guaranteed, ie. you will not suffer any loss at all even if the underlying investment didn't work well.
Typically, the Capital Guarantee "is derived" from a separate Corporate Guarantee from a financial institution. For instance, you might have a Capital Guaranteed fund and it says that the capital is guaranteed by XXX Bank.
Please note that there is NO free lunch. Thus, if a financial institution provides a guarantee, typically they would "price in" this guarantee in the product by reducing the returns to cover the "Guarantee fee", which can range from 0.5% to 1% usually. This guarantee fee might not even be apparent as it might be mixed with other expenses of the fund eg. distribution cost.
Capital Guarantee can also come from how the fund is structured. For instance, most Capital Guarantee funds are structured in this manner: majority of your money (eg. 90% is invested into bonds and the remaining (small percentage eg. 10% is invested into derivatives such as options, futures, index futures etc.
Thus, in the worst case scenario that the 10% invested suffers 100% loss, you still have the bonds which on maturity would be sufficient to pay at least the principal capital back to you.
I hope the above clarifies.