Protected Fund - Explained
What is a Protected Fund?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is a Protected Fund?
A protected fund refers to a type of mutual fund that guarantees investors a portion of their initial investment. The protected fund allows the shareholders to make a return from their investment in the stock market while guaranteeing their money. The protected initial investment and some return on capital are given back to the investors as long as they hold their initial investment to the end of the term.
How Does a Protected Fund Work?
The protected fund is a good option for those investors who are okay with lower risk levels. Funds are actively managed, and they offer investors the potential to earn returns from the investment while limiting their exposure to risk. There are various protected funds available to suit the needs of every investor. Investors are free to invest in one or more funds to match their personal risk profile. To protect the fund, there is a holding of a mix of equity investments and fixed income. A portion of fixed-income is used to partially guarantee the initial investment, while part of equity investment is for additional gain. To protect the principal investment, the portfolio manager buys an additional insurance policy and passes the costs to investors. For the initial investment to be paid back to investors, the guarantee period must first come to an end. For those investors who sell them before the end of the contractual term, they are subject to losses. They also charged some fee for early redemption. Compared to other types of mutual funds, protected funds expense ratios happen to be higher.
What You Need to Know Before Investing in Protected Fund
- You need to find out whether you will need money in the next 5 or 10 years. Early liquidation means that you are likely to pay an early withdrawal penalty and lose your principal guarantee. Also, you may lose some amount of money on your initial investment in case of market downward movement.
- Ask yourself if you will be in need of income from the investment. Remember, the guarantee applies only to those who do not take redemptions until the guaranteeing period, and reinvesting all of their distributions and dividends.
- You must pay U.S. income tax unless held in a tax-deferred retirement account
- You are entitled to benefits of the guarantee only on the contractual maturity date