In recent bear markets investors were more worried about the return of their principal than about a return on their principal. Broker-dealers and investment banks responded by marketing new types of mutual funds that guarantee, for a limited period of time, the capital invested - for a price, of course. These products are known as principal protected funds. Before investing in principal protected funds, investors ought to understand their characteristics and make sure that their broker has made a suitable recommendation.
Principal protected funds have several characteristics that every investor should understand. First, most principal protected funds guarantee the invested amount less any front-end sales charge even if the stock market falls. In many cases, the guarantee is backed by an insurance policy. Second, if the investor decides to sell any shares in the fund prior to the end of the guarantee period, usually five to ten years, the investor will lose the guarantee on those shares and could lose money if the share price has fallen since the initial investment. Third, most principal protected funds invest a portion of the fund in debt securities and a portion in stocks and other equity investments during the guarantee period. To make sure the fund can support the guarantee, many funds will hold zero-coupon bonds or other debt securities when interest rates are low and markets are volatile, which can greatly reduce any potential gains from a subsequent rise in the stock market. This allocation may also increase the risk of rising interest, which causes bond values to drop. Last, many principal protected funds carry an expense ratio that is higher than that of non-protected funds. Fees range from 1.5 percent to nearly 2 percent, of which .33 percent to .75 percent typically pays for the principal guarantee. In addition, many funds impose sales charges and redemption fees or penalties for early withdrawals.
Before investing in principal protected funds, investors should read the prospectus and keep the following points in mind:
-Do I need the money in the next 5 to 10 years? If you liquidate an investment in a principal protected fund early, you may lose your principal guarantee and have to pay an early withdrawal penalty.
-Do I need income from the investment? The guarantee is based on taking no redemptions during the guarantee period and reinvesting all dividends and distributions.
-Unless held in a tax-deferred retirement account such as an IRA, you must pay U.S. income tax yearly on the imputed interest from the fund's zero coupon bond holdings as it accrues.
-In certain market conditions, the fund may be invested in zero-coupon bonds and other debt securities forfeiting all potential gains if the stock market rises.
-If the fund achieves no gains above your initial investment, your performance would trail that of US Treasury bonds purchased with no annual fees.
-The benefit of the guarantee is only valid on the funds maturity date. If you sell your shares before or after the maturity date, you could lose money if share prices have fallen.
-The guarantee the fund provides is only as good as the company backing it. Interested investors should investigate the company's financial strength by verifying with several credit rating agencies - information can be found on the Securities and Exchange Commission (SEC) website.
Have you suffered losses in your portfolio due to an investment in a principal-protected fund? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
Principal protected funds have several characteristics that every investor should understand. First, most principal protected funds guarantee the invested amount less any front-end sales charge even if the stock market falls. In many cases, the guarantee is backed by an insurance policy. Second, if the investor decides to sell any shares in the fund prior to the end of the guarantee period, usually five to ten years, the investor will lose the guarantee on those shares and could lose money if the share price has fallen since the initial investment. Third, most principal protected funds invest a portion of the fund in debt securities and a portion in stocks and other equity investments during the guarantee period. To make sure the fund can support the guarantee, many funds will hold zero-coupon bonds or other debt securities when interest rates are low and markets are volatile, which can greatly reduce any potential gains from a subsequent rise in the stock market. This allocation may also increase the risk of rising interest, which causes bond values to drop. Last, many principal protected funds carry an expense ratio that is higher than that of non-protected funds. Fees range from 1.5 percent to nearly 2 percent, of which .33 percent to .75 percent typically pays for the principal guarantee. In addition, many funds impose sales charges and redemption fees or penalties for early withdrawals.
Before investing in principal protected funds, investors should read the prospectus and keep the following points in mind:
-Do I need the money in the next 5 to 10 years? If you liquidate an investment in a principal protected fund early, you may lose your principal guarantee and have to pay an early withdrawal penalty.
-Do I need income from the investment? The guarantee is based on taking no redemptions during the guarantee period and reinvesting all dividends and distributions.
-Unless held in a tax-deferred retirement account such as an IRA, you must pay U.S. income tax yearly on the imputed interest from the fund's zero coupon bond holdings as it accrues.
-In certain market conditions, the fund may be invested in zero-coupon bonds and other debt securities forfeiting all potential gains if the stock market rises.
-If the fund achieves no gains above your initial investment, your performance would trail that of US Treasury bonds purchased with no annual fees.
-The benefit of the guarantee is only valid on the funds maturity date. If you sell your shares before or after the maturity date, you could lose money if share prices have fallen.
-The guarantee the fund provides is only as good as the company backing it. Interested investors should investigate the company's financial strength by verifying with several credit rating agencies - information can be found on the Securities and Exchange Commission (SEC) website.
Have you suffered losses in your portfolio due to an investment in a principal-protected fund? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
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