Capital Protection 101: Guide to Stable Consistent Investment Returns

Wish to protect your investments from the volatility of financial markets? Consider embracing the principles of capital protection.

In uncertain economic times, protecting your capital has never been more crucial. As markets fluctuate and the future remains unpredictable, investors like you need to seek strategies to protect your investments.

This article guides you through the essentials of capital protection. It offers insights into capital protection, explains how it works, and provides examples of capital protected financial instruments.

You will also learn about the benefits of such investments, as well as ideas on how you can shield your finances from unforeseen downturns.

What is Capital Protection?

In the world of investment, the term "capital protection" refers to a range of strategies and financial products designed to ring fence your initial invested capital. It is attractive to investors who prioritise the protection of their principal (and sometimes interest) over the pursuit of high returns.

While most capital protected investments aim to prevent any loss of initial capital, they may also provide steady returns linked to the performance of its underlying asset or index. Such investments aim to fully return the principal sum plus interest upon the investment's maturity or end.

Imagine investing diligently to upgrade from a HDB flat to a condo. You would likely choose a financial instrument that is stable, consistent and predictable, even if the returns are not astronomically high. This is where capital protection comes in.

How Does Capital Protection Work?

To ensure the safety of the principal amount invested, various methods are applied to shield investors from losses — even in adverse market conditions.

#1 Principal Protection

This straightforward approach ensures the return of your invested capital upon the investment’s maturity. Financial institutions often back these agreements, making them a reliable option for conservative investors.

#2 Collateralisation

Here, assets or securities are used as collateral to secure an investment. In the event of a default, the collateral can be liquidated to recover the principal amount, adding an extra layer of security.

Examples of collateral include real estate (commercial, residential, industrial or mixed-use properties), equipment, stocks and bonds, cash itself, inventory, intellectual property (licences, copyrights) or even precious gems and metals.

#3 Insurance Wrappers

These involve wrapping the investment in an insurance policy, protecting the principal against market downturns or other specified risks. This method often appeals to investors looking for a combination of investment and insurance protection.

#4 Derivative Instruments

Financial derivatives like options and futures can hedge against potential losses. By locking in prices or utilising financial contracts that pay when the market moves adversely, investors can protect their principal from significant downturns.

An Illustration

Think of capital protection like purchasing various types of insurance for a home. While basic homeowner's insurance (principal protection) provides a fundamental level of protection, adding flood insurance (collateralisation), earthquake coverage (insurance wrappers), and a comprehensive home warranty (derivatives) could offer broader protection. Similarly, in investing, combining different capital protection strategies can tailor your investments to meet specific risk tolerances and return expectations.

Benefits of Capital Protected Investments

#1 Suitable for Different Life Stages

Capital-protected investments can cater to investors at various stages of life. For those nearing retirement, capital protection safeguards their hard-earned savings, ensuring a stable financial foundation for the years ahead. Young investors, on the other hand, benefit from a secure platform for wealth accumulation, providing peace of mind as they navigate the early phases of their investment journey.

#2 Manage Financial Risks

Capital protected investments counterbalance higher-risk asset classes, helping investors to craft a diversified investment portfolio that mitigates risk while still offering the potential for returns. By blending capital-protected investments with other investments, individuals can achieve a harmonious balance, safeguarding their principal against unforeseen market shifts.

#3 Hedge Against Market Volatility

During periods of market turbulence, capital protected investments stand as a bulwark. They help to preserve your principal investment from financial markets' fluctuations. For those seeking to maintain their investment's value regardless of external conditions, capital protected investments offer a reassuring option.

BigFundr — A Preferred Option for Capital Protection

Offering a fresh alternative to traditional investments, BigFundr blends principal protection with higher returns.

We employ a multi-layered system to protect investors from market ups and downs. These include access to real estate as collateral, capped Loan-To-Value (LTV) ratios at 70% of property value, first legal charge over the real estate, and personal liabilities from borrowers.

BigFundr sets itself apart by offering higher returns within short tenures of 6 to 18 months, making it an appealing option for investors looking for both protection and profitability.

To explore how BigFundr can fit into your financial plans, visit our homepage or get in touch with us to learn more.