A guaranteed equity bond is a way for savers to gain exposure to possible gains in the stock market without risking their initial deposit.
A typical bond may be linked to a stock market index such as the FTSE 100 index. If the index rises over the term of the bond, savers will benefit – but not necessarily by the full amount the index has risen.
The bond’s value at maturity is likely to be dependent on a complicated formula, based perhaps on the index’s level at the start, and its average value over the final year of the bond.
On the other hand, if the index the bond is linked to falls in value over the term, savers may simply get back the capital they invested at the start.
What are the advantages?
A guaranteed equity bond can be a way of investing in the stock market without taking the risk that all the original capital could be lost. Some offer total capital protection so even if the market falls you will get your original investment back at the end of the term. Others offer more limited protection so this is worth checking when comparing products.
When interest rates on normal savings accounts are low, guaranteed equity bonds can appear more attractive as their potential returns are higher.
What are the disadvantages?
Guaranteed equity bonds are usually very complicated, and the formulas used to work out gains can be hard to understand and compare.
The capital protection comes at a price, so savers will not get the full benefit of any increase in the underlying index.
Savers are unlikely to benefit from dividends paid to normal shareholders, although this is also the case for those who invest in a fund which simply tracks a certain index.
And even if all the original capital is guaranteed, its value may have been eroded by inflation.
Who do they suit?
Guaranteed equity bonds can be a way of investing in stock markets with less risk. But these products can be very complicated, and you should only put money in if you understand clearly how any gains are calculated and what losses you could face.