Guaranteed investment funds: how do they work?

Guaranteed investment funds guarantee investors the return of the initial capital at the end of the transaction term

Investment is often synonymous with risk. In the financial environment, certainties are rare. When money is injected into an asset, there is always the possibility that it will not be profitable, and the investor will face losses. Fortunately, in recent years several mechanisms have emerged to minimize investment risks. And guaranteed investment funds are one of them.

The investment fund belongs to what is known as collective investment institutions. Entities that group the contributions of a group of individuals and manage them in a unified way, proportionally distributing the benefits according to the contribution of each one.

There are many types of investment funds: some focus on socially responsible companies concerned about their environmental impact; others focus their investment on firms in the technology sector; others choose to diversify their capital by exploiting real estate.

In short, there is a fund for every investor profile. Some are more daring and prefer to get involved in projects that ensure a high return, even if the risk is considerable. On the other hand, other more conservative investors are not willing to put their assets at stake and choose to participate in funds with a low level of risk.

What are guaranteed investment funds?

Guaranteed investment funds are designed to meet the needs of more moderate investors. How do they do this? These funds assure savers that, once the maturity date has arrived, they can fully enjoy their initial investment.

Sometimes this guarantee extends to the return. For example, some funds promise to deliver a certain return to their participants when the term ends. This interest rate is determined in the contract so that savers know it in advance and can design their investment strategies more wisely.

Thus it is possible to differentiate between up to three types of funds. First, in fixed-return guaranteed investment funds, the investor knows that the original sum will be returned to him once the transaction is completed. And, along with it, he will receive the previously agreed return.

On the other hand, guaranteed investment funds with variable returns only ensure the return of the initial capital. In this case, the returns depend on the performance of the products invested in or other variables such as indices. If its value has increased, the investor will receive the proportional part that corresponds to him. On the other hand, if its value has decreased, he will not make any profit, although he will not lose his money either.

Finally, there are partially guaranteed investment funds. Generally, most of these funds guarantee the full return of the money. However, some only guarantee a percentage of the original amount. However, they are still a less risky option than conventional mutual funds, where losses can be greater.

But investors do not enjoy these advantages for free. There is a price to pay: they have to comply with a very strict condition: they are obliged to keep the money until the deadline. If they wish to withdraw it early, they will face severe penalties. An early withdrawal of the funds could even mean losses for the savers.

A chronology of this type of fund

How do guaranteed investment funds work? At the beginning is the marketing period, during which the fund manager is looking for participants; therefore, there is no fee to subscribe. After all, during the guarantee period, the funds charge very high fees, both on subscriptions and redemptions, intending to slow down the entry or abandonment of investors.

For the term, anyone wishing to withdraw their capital has to pay a supplement. Moreover, in these situations, the guarantee disappears, and the amount the saver receives will depend on the market value of the assets the management company invested in.

But this does not mean that the investor will not see his money again until the end of the period. Different liquidity windows open up over time. These are specific moments in which participants have the opportunity to withdraw their funds without paying a penalty.

These dates are determined by the guaranteed investment fund and are recorded in the prospectus, so it is essential to know the deadlines if you wish to accept this early withdrawal. But, again, the guarantee disappears in these cases, so it is only advisable if the assets are profitable and have yielded a profit.

Also, some funds have periodic payments: partial redemptions that are transferred to the participants occasionally. In short, they do not all work in the same way. For this reason, it is crucial to check each option's details to find the right fund.

The guarantee, the keystone of guaranteed investment funds

But what happens if the deadline arrives and the fund has suffered losses? Normally, it is the investor who bears this risk. However, the guarantor comes into play in the case of guaranteed investment funds.

The guarantor is the person or entity that undertakes to contribute the money necessary for the participants to recover their initial investment if the guaranteed net asset value is not reached, that which was promised in the contract. And this amount can be transferred in two different ways.

When the guarantee is internal, the fund receives the money to match the net asset value to the guaranteed value. When it is external, the amount is transferred directly to the investor through a letter of guarantee.

This distinction entails major differences in terms of taxation. The internal guarantee is taxed when the entire capital is withdrawn at the time of redemption. But the external guarantee must be taxed separately for personal income tax purposes, regardless of whether or not the participation in the fund is redeemed.

And what happens when the guarantee expires? This is another of the great unknowns of guaranteed investment funds. These operations have a term, and when this term ends, two doors open. Either the fund manager offers a new guarantee so that the saver can accept the new conditions to continue in it, or the guarantee is not renewed, losing its raison d'être and becoming a conventional fund.

In both cases, the investor can reimburse the money without paying commissions, a phenomenon known as free separation right.

Although it is a safe alternative with many protection guarantees, the guaranteed investment fund is not the only financial instrument capable of shielding savers. Many alternative financing systems also try to safeguard people's money, such as recourse crowdfactoring, a method based on the advance of invoices carried out on online platforms such as Inversa Invoice Market.