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Tuesday, July 10, 2007

Poor return on capital guaranteed products

Dear Mr Tan

It seems that most of the capital guaranteed product has given a poor return to their investors. Why is this the case?

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REPLY:

Due to the low interest rate, a risk free product earns about 3% per annum. To give a capital guarantee, the product issuer (ie bank) has to invest about 85% of the capital to provide the principal at the end of 5 years.

Of the remaining 15%, the marketing expenses and fees taken by the banks probably amount to 10%. This leaves only 5% to be invested in options or stock indices to give the return.

There is very little return that you can expect from an investment of about 5%. Sometimes, the option expired without any return. Sometimes, it gives a modest return, maybe 10% or 15% in total for 5 year. The chance of getting a high return (more than 15%) is small.

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