What Is a Protected Investment Bond?

A protected investment bond is a bond that is guaranteed to (at the very least) keep you from losing the initial money you invested. It is not a new type of bond, but one that is generally more popular during economic downturns. The protected bond is not meant as a short-term investment, and you should consider all aspects before choosing it as an investment option.

Fuction

The main purpose of a protected investment bond is to give a person an opportunity to grow his personal funds with less of a risk of losing his initial investment. The terms are set for the life of the bond; when it is over, the investor will typically get his investment back, plus whatever increase there was in the market value. At the very least, the investor will be guaranteed to get back his original funds at the end of the investment period.

Time Frame

Generally, protected bonds are set at 5 or 10 years, or sometimes longer. A person should not try to retrieve her money before the time period is up. These bonds are set as longer investment so the market value has more of a chance to increase by a substantial percent. Having a bond that only lasted 1 year would not give the market enough time to increase the value of the bond; therefore, the investor wouldn't make much money.

Considerations

An investor should take care in choosing a protected bond. Different companies offer different percentages that they are willing to give in profits. Some will give as little as 50 percent of the increased value of the bond. You should look for an investment company that is willing to give as close to 100 percent as possible. After all, it was the investor's money that was growing in value, and it should be the investor who receives most of the profits.

Benefits

If an investor cashes in her protected bond at the designated time, she will typically receive her initial investment back. In this way, there is no risk to the investor. Normally, income tax is paid through the investment program, which means that most individuals will not owe any taxes on their investment profits once they cash in the bond. However, some investors in higher tax brackets might have to pay some additional taxes. One other bonus is that most protected bonds have no hidden fees or extra charges at the beginning of the investment that might cut into the capital that can be invested in the bond.

Warning

The worst thing an investor can do is to cash in the bond before the bond has matured. Doing so can obviously cause the investor to lose any potential gain on the investment, and in some cases might cause him to lose part of his original investment. An investor should also look at all paperwork associated with a protected bond before investing. This is to ensure that he clearly understands how much of his initial investment is guaranteed not to be lost should the investment not gain in value--or, worse, drop. Not all protected bonds will protect 100 percent of an initial investment. It is up to the investor to make sure the conditions are understood.