What is a tracker bond?

Image attribution: 401(K) 2012; CC BY-SA 2.0

By Catherine Halsey

A tracker bond is a fixed-term investment in the stock market. Upon acquiring one, most of your money will be put in a deposit-based account, while the remainder will be invested in stocks. A tracker bond is set for a fixed term, usually of at least five years. During this time, no withdrawals can be made from the tracker bond. The buyer is given a certain level of capital guarantee, with the level varying according to the degree of risk they wish to take.

A tracker bond can be treated as a long-term saving option, for only once the bond has matured will the investor be able to access it.

Things to consider

When purchasing a tracker bond, the buyer has a number of options to consider. The term of the investment – be it five, seven or more years – will first be determined. Then there is the level of capital guarantee to set, depending on the buyer’s chosen level of risk. In addition, there is the participation rate, which measures the level of participation the investor will have in the growth of the chosen stocks. Finally, a cap may be placed on gains. Ideally, the investor will want there to be no cap on gains, as this limits the potential profit to be made.

Low risk

Tracker bonds are generally regarded as being low-risk investments. This is because many tracker bonds offer 100 percent capital security. This ensures that even if your stocks perform worse than expected, you will at the very least receive your initial investment back at the end of the full term. However, it is worth bearing in mind that were this to happen, your money would likely be worth less in five years’ time due to inflation.

Conversely however, if your bond performs well, there is the opportunity to make a significant return on your investment. How much you stand to make depends on a number of factors, including the cap (if any) that has been set; this may be set at 50% of your initial investment for example.

To maximise your return, choose a tracker bond that doesn’t offer 100% capital security. Provided you’re confident in the ability of your chosen stocks or financial indices to perform, this a smart way to increase your potential profit.

If you’ve got a sum you’re looking to invest but don’t relish the stock market’s unpredictability, a tracking bond could be the answer. There’s less risk, and if you choose well, you could be enjoying a lump sum in just five years.

About the author: Catherine Halsey writes for a digital marketing agency on a range of subjects. This article links back to http://www.ulsterbank.co.uk/ni/personal/saving/long-term.ashx