DEFINITION of 'Protected Fund'
A type of mutual fund that guarantees an investor at least the initial investment, plus any capital gains, if it is held for the contractual term. The idea behind this type of fund is that you will be exposed to market returns because the fund is able to invest in the stock market, but you will have the safety of the guaranteed principal.
BREAKING DOWN 'Protected Fund'
The initial investment is protected by an insurance policy in case the fund is unable to pay the investor back his or her principal. The initial investment can only be paid back after the guarantee period is over; if the investor sells before this period, he/she is subject to the current value of the fund and any losses that may arise. This type of fund tends to have higher expense ratios than other types of mutual funds.
While protected funds state that you will be guaranteed at least your original investment in addition to being exposed to market returns, these funds are often heavily invested in fixed-income securities and have less weighting in the stock market.