Guaranteed Equity Bonds
Stock market investments can seem enticing thanks to their potential returns, especially in comparison to the basic interest you would expect to earn from a regular savings account. Nevertheless, stock market investments are risky and can be result in big losses. Banking institutions attempt to lessen the risk for customers and thus encourage them to invest by offering investment packages that provide both the allure of potential investment returns from the stock market and guaranteed return of your original investment.
Most banking institutions offer Guaranteed Equity Bonds, or GEBs, also referred to as Guaranteed Capital Investments or Capital Protected Investments. You may be able to apply for GEBs in-branch, or need to make your application by post. The exact terms and conditions of the investments on offer may differ, but distinctively GEBs will guarantee to return the total value of the capital invested, providing the capital remains invested for duration of the agreed period. If the invested capital is withdrawn before the bonds mature, that is, before the agreed end of the investment period, you will usually incur charges and the value of your initial investment is no longer guaranteed.
GEBs are linked to the stock market, usually via one of the stock market indexes such as the FTSE; they offer good investment returns when the index in question the stock-market increases, for example, paying you 125 % of the FTSE 100 growth over the investment period. However, there is usually a maximum returns policy, for example, up to a maximum of fifty percent of the original capital value. This protects the financial institutions against unexpected stock market increases, enabling them to offer you a capital guarantee.
There are further terms and conditions to bear in mind when considering investing in Guaranteed Equity Bonds. GEBs offer you returns only when the stock market index increases. It is easy to mistake the predicted investment returns for guarantees, when in fact there is no certainty that you will make any money. If the stock market index falls in value, your initial capital is protected but you will not earn any returns. It is also common for returns to be limited, restricted perhaps to a percentage of the value of your capital (such as returns to a maximum of fifty percent of the capital value) or to a percentage of index growth (such as returns to a maximum of eighty percent of the index growth). Also, since you are not directly investing in the stock market, you will not be eligible for dividend payments which are made to shareholders.
You should also remember that if you invest your money, it will be protected against a stock market crash but not against inflation. If you do not earn good investment returns, the value of the original capital you invest will be returned but its buying power may have reduced over the period of investment.
You can choose to invest in GEBs as part of your Stocks and Shares mini ISA: for more details ask your financial advisor.
Commonly GEBs are issued for a limited time only, and so the terms and conditions of individual investment packages can even vary within one financial institution.
