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My mother told me that in 1994, she had $10K to put into a savings account or CD. She went to the local Citibank and didn't like the interest rates that they were offering on their savings/CD accounts. The bank representative told her about an interesting product that they were offering. It was some sort of S&P 500 investment, except there was no risk. The representative told her that she could invest her $10K in this product for 5 years, and if after five years the S&P 500 had dropped, the bank would eat the loss and return the $10K to her. But if after five years the S&P 500 had risen, then she could keep all the profits. The representative assured her that she would not lose any money, so she thought it was a great deal and put her $10K in it.

My mother said that in 1999, the S&P 500 had gone up during those 5 years, and the bank returned about $25K to her. Looking at a chart of the S&P 500, it rose over 150% during that period, so she really did get to keep most/all of the profits. She said she asked Citibank if she could invest in that product again, but they said they were no longer offering that product.

Is there a name for this type of a risk-free investment product, where the bank is willing to return 100% of your principal if the investment goes south? I wonder if any bank offers such a product nowadays.

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    Side note: a risk-free investment is called a scam. Best case this is a low risk investment.
    – David says Reinstate Monica
    Jan 15, 2016 at 13:42
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    It's not strictly risk free. The risk is that if the S&P performs badly you get less than you would if you had put the money in a CD. It's limited risk, in that you can only lose the interest you would have got.
    – DJClayworth
    Jan 15, 2016 at 16:31
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    @DavidGrinberg, investments with risk-free of your initial capital do exist and they are not scams. Before you make smart aleck comments you should know what you are talking about.
    – user9822
    Jan 15, 2016 at 22:34
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    @DavidGrinberg, I said where your initial capital is risk free, future profits are at risk. They are called Capital Guaranteed Investments. You can look up the term, and usually the returns are linked to the stock market so potentially much higher than a savings account.
    – user9822
    Jan 15, 2016 at 22:40
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    @DavidGrinberg, but hang on this is different from being a scam, which is what you initially said.
    – user9822
    Jan 15, 2016 at 22:58

5 Answers 5

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This sounds a lot like an Equity-indexed Annuity. They date from about 1996 (there is a bit of skepticism about them, as they are tricky to understand for the typical investor). For instance, an equity indexed annuity pays a portion of the gain in an index (like S&P 500) when the stock market rises, and guarantees you won't lose if it falls. In an arbitrage sense, it is roughly equivalent to buying a mixture of bonds and index (call) options.

There are a lot of complicated 'tweaks' on these, such as annual ratchet/annual reset, interest caps, etc.

There is quite a bit of debate about whether they are too good to be true, so I'd read a few articles with pros and cons before buying one.

These are also commonly called FIA (Fixed indexed annuities).

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My Credit Union offers a market-linked CD where the investment has FDIC protection if it is held to maturity, but otherwise they are linked with the S&P 500. it comes with this warning:

Market-Link CDs are not appropriate for all depositors including clients needing a guaranteed interest payment or seeking full participation in the stock market. If redeemed prior to maturity, the amount received will be subject to market risk including interest rate fluctuations an issuer credit quality.

So they still do exist. Another credit union I belong to has a similar product. The risk is that if you need the money early, there may be losses. There would also not be a way to switch to a more conservative posture as the CD approached maturity, if you were interested in protecting your gains.

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  • Note per @Mason's answer below, the other risk is that inflation is not protected by an interest rate payment in the event that S&P losses exist for that period.
    – Grade 'Eh' Bacon
    Jun 28, 2016 at 13:38
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These products are real, but they aren't risk free:

1) The bank could go under in that time. (Are the investments FDIC insured?)

2) Your money is locked up for 5 years, probably with either no way to get it back out or a stiff penalty for early withdrawal, so you risk having a better investment opportunity come along and not having the liquidity to take advantage of it.

3) If the market does go down and you get 100% of your principal back, the endless ratchet of inflation practically guarantees that $10K will be worth less 5 years from now than it is today, so you risk losing purchasing power even if you're not losing any nominal quantity of money.

It's still a fairly low-risk investment option, particularly if it's tied to something that you have reason to believe will increase in value significantly faster than inflation in the next 5 years.

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    Even 3% inflation per year over five years is a loss of 15.9% of purchase power. So effectively you'd put in $10,000 and worst case get back $8,400 real; best case, the positive return is unbounded. Keeping the money liquid in case a better investment comes along also similarly costs whatever the rate of inflation is at the time. With most low-risk investments, generally speaking, at best you can hope to keep pace with inflation, not exceed it.
    – user
    Jun 28, 2016 at 11:23
  • This is a useful note - in finance a guaranteed interest-earning investment such as a T-Bill is used as the 'interest free' rate (even though some risk such as due to significant market collapse exists). With such investments, the risk of inflation is largely negated due to the assumption that floating interest rates will meet or exceed inflation. With a product that returns capital only, the inflation risk is again present.
    – Grade 'Eh' Bacon
    Jun 28, 2016 at 13:37
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This is what is called a Structured Product. The linked page gives an overview of the relative pros and cons. They tend to hold the bulk of funds in bonds and then used equity index futures and other derivatives to match returns on the S&P, or other indices tracked. All combine to provide the downside protection.

Note that your mother did not receive the dividends paid by the constituent companies. She only received the capital return.

Here is a link to Citigroup (Europe) current structured product offerings.

Here is a link to Fidelity's current offerings of structured products.

Here is Investopedia's article detailing the pitfalls.

The popularity of these products appears to be on the wane, having been heavily promoted and sold by the providers at the time your mother invested. Most of these products only provide 100% protection of capital if the market does not fall by a specified amount, either in successive reporting periods or over the life of the product. There are almost as many terms and conditions imposed on the protection as there are structured products available. I have no personal experience buying this type of product, preferring to have the option to trade and receive dividend income.

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The name of this type of investment is Capital Guaranteed Investment, and yes they do exist, some financial institutions do offer them from time to time and they can be better than putting money in the bank.

Unlike what someone else said, your money is not is not locked for the five years. You can take out your investment at any time, but if you do take your money out before the term (5 years in your mother's case) the capital gurantee is void. So you would only withdrawal your money if the investment is currently in proffit, because if it is at a loss when you go to withdrawal, you get hit with the loss.

In many cases you will get a third party, usually a large bank, being guarantor for the capital guarantee, and they in turn get paid for this obligation.

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    Whether or not your money is locked in depends on the specific type of investment. The Equity Indexed Annuities, for instance, famously have high surrender charges. The OPs description could fit with one of those.
    – user11599
    Jan 16, 2016 at 0:08
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    I had such an investment about 10 years ago, it had a full term of 7 years and had a rising gurantee where if it made a profit in a year part of that profit would be added onto the guaranteed original investment. However, I withdrew my money out after 5 years at a profit of 45%. There was no penalty for early withdrawal except that if the fund was in negative teratory you would not get the guaranteed amount anymore, you had to hold the investment to maturity to get the Rising Guarantee.
    – user9722
    Jan 16, 2016 at 21:05

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