What is a 'Capital Guarantee Fund'

A capital guarantee fund is 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.

These funds may also be referred to as "capital-protected funds."

BREAKING DOWN 'Capital Guarantee Fund'

Capital guarantee funds essentially provide a risk-free investment. Capital invested in a capital guarantee fund is protected from losses with some potential for upside appreciation. Investors should do comprehensive due diligence on these funds since they can be structured in different ways and in some cases only a percentage of capital may be guaranteed against losses.

Capital guarantee funds are offered globally and include different types of underlying investments in different countries. While offering a capital guarantee on the investment, capital guarantee funds are generally known for illiquidity. These funds do not offer easy access to invested cash and capital invested will be locked in for various time periods.

Generally, a capital guarantee fund will require that an investor remain invested for a certain number of years, making these investments best for investors with a long-term investment goal. Illiquidity is a primary characteristic of capital guarantee funds because of their structuring. Typically, a capital guarantee fund will use the invested capital to invest in low risk fixed-income securities, such as bonds, which need time to reach maturity and repay invested principal.

Capital Guarantee Fund Advantages

Capital guarantee funds offer some return advantages for investors comfortable with the investment’s illiquidity. The returns on these funds can be higher than savings account or money market returns. Capital invested in the funds is guaranteed. In order to minimize the fund's risk of absorbing losses, fund managers will keep the majority of underlying assets conservative in vehicles such as bonds. They may invest a small percentage in higher risk equity securities.

Capital Guarantee Fund Investments

Prudential has been a leader in the capital guarantee funds market. It introduced capital guarantee funds backed by Prudential Retirement Insurance and Annuity Company (PRIAC) with targeted maturity dates through 2025. It also offers capital guarantee funds through defined contribution plans. Additionally, it has a Guaranteed Retirement Income platform from which numerous capital guarantee investments are offered.

  1. Financial Guarantee

    A financial guarantee is a non-cancellable indemnity bond backed ...
  2. Guarantee Company

    A form of corporation designed to protect members from liability, ...
  3. Guaranteed Investment Contract ...

    Insurance contracts that guarantee the owner principal repayment ...
  4. Leased Bank Guarantee

    A leased bank guarantee is a bank guarantee, which is leased ...
  5. Capital Appreciation Fund

    A capital appreciation fund is a fund that attempts to increase ...
  6. Capital Funding

    Capital funding is the money that lenders and equity holders ...
Related Articles
  1. Retirement

    The Cost Of Variable Annuity Guarantees

    These products tempt investors with some impressive benefits - but they come at a price.
  2. Retirement

    An Introduction To Target Date Funds

    Target date mutual funds can be an alternative to bonds and CDs for investors who do not wish to actively manage their savings. The reason: These financial products periodically reallocate fund ...
  3. Retirement

    Top 5 Prudential Funds for Retirement Diversification in 2016 (PRU)

    Discover five mutual funds from Prudential Financial for diversifying a retirement savings portfolio that have a history of stable returns.
  4. Financial Advisor

    Protect Mutual Funds From a Volatile Market

    Learn about the best ways to invest in mutual funds, including which types of funds are safest, while still protecting your investment from market volatility.
  5. Financial Advisor

    CWGIX: Overview of Capital World Growth & Income Fund

    Learn about the American Funds Capital World Growth and Income Fund, a world stock fund that seeks quality stocks on any of the world's largest exchanges.
  6. Retirement

    Top 5 Oppenheimer Funds for Retirement Diversification in 2016

    Discover the top five Oppenheimer Funds for diversifying your retirement savings. Learn how to balance your portfolio for maximum safety and return.
  7. Investing

    10 American Funds Mutual Funds with Long Track Records

    Learn about the performance of the mutual funds offered by Capital Group's American Funds that have the longest established track records.
  8. Investing

    The 5 Best American Funds

    Discover five of the best-performing mutual funds offered by American Funds, based on the funds' five-year average annualized returns.
  9. Investing

    When To Buy A Mutual Fund

    Doing a little research can help you find out if mutual funds are a good fit for your portfolio.
  1. Can mutual funds only hold stocks?

    Learn about which types of mutual funds consist of only stocks, which may include stocks in addition to other assets and ... Read Answer >>
  2. How does market risk affect the cost of capital?

    Find out how market risk directly affects the total cost of capital, including how to use the capital asset pricing model ... Read Answer >>
  3. What typically comprises a money market fund?

    Learn about the basic types of money market funds and discover how they are characterized by the types of investments that ... Read Answer >>
  4. How is working capital different from fixed capital?

    Understand the differences between working capital and fixed capital, including definitions and examples of how businesses ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  5. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  6. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
Trading Center