GUARANTEED FUND
A guaranteed fund comes with a promise by the guarantor to repay a portion, usually 100% of the principal at maturity. Guaranteed funds can also incorporate guaranteed coupons payable regardless of the underlying performance and/or non-guaranteed coupons linked to the performance of underlying assets, often a stock index or basket of stocks. ‘Guaranteed’ does not mean the investment is risk-free. The guarantee on principal repayment usually holds only when the product is held to maturity, and is subject to credit risk of the guarantor. Investors who redeem early are usually repaid at net asset value and thus subject to market risk. A guaranteed fund is constructed by investing part of the proceeds in a zero-coupon bond or other fixed income instrument – which underwrites the guaranteed payment at maturity – and the rest of the money in an embedded call or put option on the underlying for additional returns. Hence, investors also run counterparty risk in relation to the option strategy. A guaranteed structure can also take the form of a guaranteed note or guaranteed bond. Generally, any structured product with a promise to return 100% of the principal invested at maturity can be considered a guaranteed product.