Investment Dictionary

Return of Principals Guarantee (Principal Protected Funds)

There are several common characteristics shared by these investments: 1. Guarantee principal. Most principal-protected funds guarantee your initial investment minus any front-end sales charge even if the stock markets fall. In many cases, the guarantee is backed by an insurance policy. 2. Lock-up period. If you sell any shares in the fund prior to the end of the \"guarantee period\" – a period of anywhere from 5 to 10 years – you lose the guarantee on those shares and could lose money if the share price has fallen since your initial investment. 3. Hold a mixture of bonds and stocks. Most principal-protected funds invest a portion of the fund in zero-coupon bonds and other debt securities, and a portion in stocks and other equity investments during the guarantee period. To ensure the fund can support the guarantee, many of these funds may be almost entirely invested in zero-coupon bonds or other debt securities when interest rates are low and equity markets are volatile. Because this allocation provides less exposure to the markets, it may eliminate or greatly reduce any potential gains the fund can achieve from subsequent gains in the stock market. It also may increase the risk to the fund of rising interest rates, which generally cause bond prices to fall. 4. Higher fees. Many principal-protected funds carry an expense ratio (the total annual fees deducted from your holdings) that typically is higher than that of non-protected funds. Fees range from 1.5% to nearly 2%, of which .33% to .75% typically pays for the principal guarantee. In addition, many funds also impose sales charges, plus redemption/penalty fees for early withdrawals that may be significant.

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