Capital investment bonds are the best alternative for people who like the stock market but do not want to take the risk. Capital investment bonds do not give ownership rights to investors. They provide consistent and steady income. Compared to stocks, capital investment bonds are safer.
Purchasing of capital investment bonds are like giving a loan to issuing entity. Based on the type of capital investment bond that is purchased, investor would get periodic interest payments or a lump sum greater than purchase price at maturity. Capital investment bonds have a defined time limit. This ‘time to maturity’ differs with bonds. While some bonds take 30 years to mature, there are bonds that mature in a month too.
Types of Capital Investment Bonds
Capital investment bonds are of two main types – coupon bonds and zero coupon bonds.
Coupon bonds – investor has to pay full face value of bond while purchasing coupon bonds. Investor will receive periodic interest payments throughout the life of bond. On maturity of bond, the investor is paid back the face value of bond.
Zero coupon bonds – investor does not receive periodic payments in this kind of capital investment bond. These bonds are bought at a discount price to the face value of bond. For instance, a zero coupon bond of value $500 can be bought at $300. On maturity, the investor receives $500 from issuing entity.
Basics of Capital Investment Bonds
Simply put, capital investment bonds protect the investor’s capital even if stock market prices fall. In the event of stock market upturn, investor can be sure of making profit. Thus, the safety of capital protection ensures that there are no actual losses, but only notional losses where capital investment bonds are concerned. This makes capital investment bonds an ideal choice for retired people who cannot financially handle a loss and working people who are aiming for long term investments. The only risk associated with capital investment bonds is that the investment capital is not eligible for interest for the investment period irrespective of loss incurred.
Capital investment bonds have no maximum limits that can be invested. Investors can invest as much as they want to. But there is a minimum entry bar and this is usually higher than that of other bonds. Another aspect of capital investment bonds that can be advantageous to investors is that these bonds come with many different durations. There are capital investment bonds that starts from three months. Uncertain stock markets, low risk involved and an environment of low interest makes capital investment bonds all the more lucrative.
Capital investment bonds offers investors the flexibility, access to a wide range of funds across various sectors and right of choice. Some investors consider capital investment bonds as the ideal tool for diversifying their investment portfolios. The peace of mind and sense of security that capital investment bonds extend provide a breathing room amidst other investment avenues.
Capital Investment Bond Conveniences
Capital investment bonds come with advantages that makes investment in them easier as well as convenient. These include:
- Wider choice where charging options are concerned.
- Investors can withdraw up to 5% per year.
- Inheritance tax liability can be reduced.
- Investment policy can be partially surrendered to enjoy regular withdrawals.
- Investor can make additional investments to existing bond.
- Unlimited funds can be switched without any charge.
- Investors have phased investment option.
Capital investment bonds assure that investors have a protection mechanism by which their capital investment portfolio is protected in times of down turns in the market and when the time is good, they can reap the benefits in the form of interest accrued.
Capital investment bonds are a more predictable investment. On purchase of new bonds, investor would know the monthly and quarterly payments he will receive allowing him to plan and budget better. Moreover, bondholders are in a more advantageous position when compare to stock holders in the event of the municipality or company declaring bankruptcy. According to bankruptcy laws, bond holders have to be paid back prior to stockholders. Investors can hold on to their capital investment bonds until maturity and reap benefits.
Capital Investment Bonds and Associated Risks
The risks that are associated with capital investment bonds include the fluctuation of value that the investment has to witness as well as tax charge in the event of cashing of bond prior to maturity. Capital investment bonds are not without risk though, since in the event of issuing entity declaring bankruptcy, investor stands to lose part of whole of investment.
Prices of bonds are prone to fluctuation. This is not an issue if investor plans on holding on to his capital investment bonds to maturity. In the event of investor selling his bonds before maturity, there are chances that he might have to sell them at a lower price than he had initially purchased them for.
Capital investment bonds have management charges and these vary over companies. They are usually levied as an annual fund charge or even as an initial charge and early en-cashment charge. Companies usually have complete detailed literature regarding management charges and these have to be carefully read and understood prior to buying bonds. Capital investment bonds are preferably medium term investments. Investors hold on to them for an average of 5 years. The bond can be sold out earlier, but companies usually prefer to base its costs on a minimum term of 5 years. In the event of cashing in early, a withdrawal charge is levied.
Investors are given a key features document and personal illustration document while purchasing bonds. The section on ‘Risk Factors’ should be carefully read. The possible disadvantages associated with the contract would be highlighted here. Investors should bear in mind that price of units can fall and rise according to the market and they should not base their selection of company on past performance since past performance is not a definitive guide to future performance. Invest with care and caution.