A guide to fixed term investments
Many potential investors avoid putting their money to work because of the risks involved with investing. But there are ways to get some of the benefits of investing in the stock market, for example, without all of the downsides and one is to invest in fixed term investments / structured products.
We do not currently offer fixed term investments.
Fixed term investments – an introduction
While fixed term investments / structured products aim to repay your capital at maturity, they can appear complex so it’s important you understand what they offer before you commit. Some, for example, pay a higher proportion of stock market gains while others are designed to repay all or part of the money you invested in the event the stock market falls.
Fixed term investments / structured products tend to fall into 2 main categories:
- Those which aim to repay all of the original amount invested at the end of the term regardless of the performance of the “underlying” asset or index.
- Structured capital-at-risk products (SCARPs), where the investor could lose some or all of the money they invest even if they hold to the end of the term.
The mix of investments available means that those who are willing to take more risk can choose to go for SCARPS that offer less chance of repaying your capital with the benefit of greater potential returns. Indeed, a savvy investor may decide to spread his or her money across a number of investments from different providers to maximise their return and to help repay their initial investment.
Remember, though, that even with products that aim to repay your capital at maturity, you could lose money if you cash in your investment before the agreed end date.
Also remember that if the company that offers the product is unable to meet its financial obligations, you could also lose money. For this reason, an investor may choose to invest in fixed term investments / structured products only as part of a balanced portfolio.
What is a fixed term investment?
A typical fixed term investment / structured product will normally have 2 underlying elements that are purchased with your money:
- A component that aims to repay your capital at maturity. This could, for example, be used to repay your original investment at the end of the term.
- A component linked to the value of something else, such as a stock market index. This is used to provide the potential growth element that you could receive at maturity.
Some of the more common plans across the market include:
- Defined returns
You get a fixed return if the underlying stock market index has not fallen by the end of the term. For example, an investment may offer a fixed return of 40% of your initial investment at the end of 5 years – plus your original investment. However, if the FTSE falls over that time you will only get back your original investment.
- Minimum return
You get a minimum return regardless of the performance of the underlying stock market index. For example, an investment may offer a fixed return of 20% after 5 years plus a further 20% if the FTSE 100 climbs by more than 20% over the period.
- Maximum return
This plan pays the full market return up to a certain limit. For example, a bond might pay all returns on the FTSE 100 up to maximum of 50%. If the FTSE is lower than its “strike price” at the end of the 5 years, you get your money back. If the FTSE 100 grows 45% over the term, you get your investment back plus a return of 45%. If, however, the FTSE 100 grows 60% over the term, you will get your investment back plus the maximum return of 50%.
Structured capital-at-risk products (SCARPs)
Structured capital-at-risk products (known as SCARPs) aim to return the original money invested at the end of the term unless the index or asset price to which the product is linked has fallen below a predetermined threshold. If this happens you can quickly lose your original money. For this reason, if you decide to invest in fixed term investments / structured products they should form only a small part of a balanced investment portfolio.
Spreading your money across different investment types can provide a mix of risk and reward, so long as you follow the golden rule of leaving your money invested for five years and longer.
You should also consider spreading your investment between several products that rely on different financial institutions (sometimes referred to as 'counterparties') to protect your money. You should always find out which financial institution is ultimately responsible for offering any component that aims to repay capital, and if it is not clear you should seek professional advice.
It’s vital that you understand the differences between the various types of fixed term investments / structured products. The component that aims to repay capital for the fixed investments / structured products we sell is provided by Barclays Bank PLC. If Barclays Bank PLC were unable to make payments due under the investment, you could get back less than is due to you or nothing at all.
It's considered good practice for investors to limit their exposure to structured products to 25% of their overall investable assets, with no more than 10% of these assets being exposed to a single financial institution.
What you need to check
There are many things to think about before investing in fixed term investments / structured products, including:
- It's considered good practice for investors to limit their exposure to fixed term investments / structured products to 25% of their overall investable assets, with no more than 10% of these assets being exposed to a single financial institution.
- The small print. Make sure you fully understand what you’re committing to.
- What level of repayment of capital at maturity is provided (if any). Be sure you understand how this is calculated.
- The term and whether there are penalties for cashing in early.
- What index or indices the product is linked to. Some are more volatile than others.
What's the next step?
How to apply:
- If you know what risk you're happy to take and are comfortable making your own investment decisions without the help of a financial adviser, view our Investment products and read our brochures before applying online from just £3,000.
- Remember: if you are unsure if an investment is right for you, please seek independent financial advice.