DEFINITION of 'Capital Guarantee Fund'

An investment in which the investor's principal is shielded from losses. With a capital guarantee fund, any losses experienced by the underlying investments are absorbed by the fund company, which tends to invest the majority of fund capital in very conservative securities to help minimize the likelihood of losses, a move that also limits return.

Also called a "capital-protected fund."

BREAKING DOWN 'Capital Guarantee Fund'

Capital guarantee funds are low-risk, but also low-return. A fund may require that an investor remain invested for a set number of years, as many of the underlying securities are bonds that need time to reach maturity and, subsequently, repay principal. The return on these funds can be higher than savings account or money market returns. Fund managers, in order to minimize the fund's risk of absorbing losses, will keep the majority of underlying assets conservative in vehicles such as bonds. They may invest a small percentage in high-risk equities.

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