What is a guaranteed equity bond?
Guaranteed equity bonds (GEBs) allow you to invest in the stock market while protecting your capital even if the stock market doesn’t perform.
This means you have the potential to make money when the stock market goes up and the assurance that you won’t lose the initial deposit you invested when the market falls.
Who are guaranteed equity bonds suitable for?
While there is a cap on how much you can profit from the stock market performance, if your priority is to minimise risk rather than going for a high-risk, high-reward option, capital-protected bonds [MA3] can be the right option for you.
How does it work?
Guaranteed equity bonds are calculated using a stock market index like the FTSE 100, instead of directly investing in the stock market. If the index rises over the term of the bond, savers will benefit whereas if the index falls, you’ll still get hold of your initial investment regardless of stock market performance.
GEBs are so-called ‘structured products’ and tend to involve a third party investing your money in a variety of markets. These often come in the form of offers and are on the market for a couple of months before the product expires.
Bonds are usually a long-term investment, ranging from three to five years.
What you should look out for:
- Specific application periods
- What percentage of capital is guaranteed (may not be 100%)
- Whether withdrawals are allowed
- Minimum investment needed (often between £500 and £1,000)
What are the advantages of guaranteed equity bonds?
If you opt for capital-protected bonds you pay for a low-risk investment. So while you’re investing in the stock market you’re assured that the initial investment will be returned to you, which can buy you some peace of mind. Other advantages include:
- They are a safer investment than stocks as investors are prioritised over shareholders if liquidation occurs
- While bonds are affected by economic changes, they tend to be more stable than stocks
- Interest from bonds can sometimes be higher than what you would receive in dividends
What are the disadvantages of guaranteed equity bonds?
- Your returns will be capped; even if the stock market performs well, you won’t receive the equivalent of the risen index as you pay for the lowered risk
- There may be extra charges that aren’t clearly stated
- You won’t be able to benefit from dividend income as you would if you were to invest directly
- If you withdraw the investment before the term is up, you won’t receive any returns and will usually have to pay a penalty charge
- Returns are taxed as income and could move you to a higher tax band
- While the original capital is guaranteed, its value may be eroded by inflation
To calculate your rate of return, there are two factors that you need to consider:
- The index’s level at the start
- The average value over the final year of the bond
If the index rises over the term of the bond, savers will benefit – but not necessarily by the full amount the index has risen.
How are returns calculated?
Returns are usually calculated by identifying the position of the FTSE 100 index at the start of the investment term, which is then compared to the end level. The last index position is usually averaged over the last six months or year.
Bonds usually earn a fixed rate of interest. This interest is calculated regularly and added to your bond where you’ll also benefit from compound interest.
How returns are calculated can vary however, which will affect your payout, so comparing deals can be difficult. It’s a good idea to head over to our comparison tool for a clearer picture of what is offered.
When to invest
Timing plays an important factor in making investments as they are based on stock market performance. It’s a good idea to look into possibilities of volatile changes on the horizon that’ll affect the market. Savers who purchase GEBs tend to profit most when they start investing at a time the stock market value is at a low. If you can reasonably expect the stock market to improve over the full term of your investment, you may benefit from greater returns.
Here are a few time-sensitive factors that will affect your GEB investments and worth considering:
- The political climate, for instance Brexit
- The economy, for instance periods of inflation
- General stability, in the wake of natural disasters and so on
Types of guaranteed equity bonds
- FTSE trigger: Investors receive a fixed return if the stock market didn’t fall by the end of the term
- Capped returns: Investors may benefit from the full market return, but certain limits may be imposed
- Market gain: Investors receive a fixed percentage when the stock market goes up
Compare guaranteed equity bonds
Guaranteed equity bonds are usually difficult to make sense of, and the formulas used to work out gains can be hard to understand and therefore compare. To help you assess just which guaranteed bonds are most lucrative to date, the MoneySuperMarket comparison tool will give you the relevant information you need to find the right fit for you.
Simply tell us a little about your savings goals and we’ll give you a list of tailored options for you to choose from. It’s a good idea to look for alternative saving solutions in case you find a regular ISA savings account has a more competitive interest rate than the equity bond option you’re considering.