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."

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 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.

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.