Home > Sorted sections > Investing > Investment guarantees

Investment guarantees

A guarantee promises you’ll get your money back if your investment, or the institution you have invested in, fails.

The New Zealand Government is now guaranteeing retail deposits in approved financial institutions.  Some investment schemes also offer their own guarantees – usually limited to your capital only.

Crown Retail Deposit Guarantee Scheme

Introduced on 12 October 2008, this scheme followed similar ones introduced in the UK and Australia to improve investor confidence at a time of global financial uncertainty.

If you have a deposit in an approved institution, the Government guarantees to pay your money and any interest earned (to a limit of $1 million) if the institution gets into difficulties and is unable to pay you itself. There are a number of situations known as "default events" which would trigger the guarantee. These include the failure of an institution to pay a required sum to an investor (including interest payments), and an institution becoming insolvent or being placed into statutory management.

Financial institutions apply to be covered by the scheme, which is open to New Zealand-registered banks as well as building societies, credit unions, and deposit-taking finance companies.

The current guarantee scheme will operate for two years (from 12 October 2008). Money you invested in an approved institution before this date will also be covered.

The government has announced that it will extend the Retail Deposit Guarantee Scheme to 31 December 2011 and change some of its terms and conditions. See the Treasury website for more information on the scheme extension and changes to the terms and conditions.

Under the current scheme your money will be guaranteed if it is in a deposit, term deposit, current account, bond, bank bill or debenture with an approved institution.

Some "collective investment schemes" (e.g. Cash PIE funds) that invest only in New Zealand government securities or debt securities issued by approved banks and other institutions may also be covered by the guarantee scheme.

Visit the Treasury website to find out the current list of approved institutions, or to read questions and answers on the scheme.

Other government guaranteed investments

The New Zealand Government also guarantees money invested in KiwiBonds, including the rate of interest earned.

Because investments with a government guarantee carry a lower risk, they usually offer lower returns and are best suited as an “income” or short-term investment rather than a “growth” or medium-to-long-term investment.

Capital guaranteed investments

Some investments promise both high returns and a capital guarantee – that no matter what happens to the value of your investment, they will pay you back your capital (the amount you initially invested) when the investment matures.

These schemes typically invest your money in complex investment structures like hedge funds and futures, with the capital guarantee being provided by a bank or other financial institution. Other features include:

  • The term of these investments is usually between 6-10 years.
  • The capital guarantee is only paid when the investment matures.
  • Your return is not usually guaranteed (though some schemes may guarantee a percentage of earnings each year in addition to your capital).
  • Fees are often high.

Unlike a cash investment you don’t receive interest each year and your funds may be invested in a wide variety of areas including shares and futures, so these schemes should be regarded as “growth” rather than “income” investments. You also need to be satisfied with the stability of the financial institution that is providing the guarantee.

Due to the complexity of these schemes, you should get advice from a qualified adviser and make sure you understand all the details.

 

 

Glossary: investment
A way to use your money to make it grow.
Glossary: interest
Money paid in return for the use of money. If the bank is using your money (in a savings account) they pay you interest. If you are using the bank's money (via a loan), you pay the bank money.
Glossary: term deposit
Money deposited for a fixed term - usually between 30 days and five years. If you want your money back before the term is up you may have to forego a portion of your interest as a penalty.
Glossary: securities
Piece of paper that proves ownership of stocks, bonds and other investments.
Glossary: debt
Debt is what you owe - it comes in many forms, including mortgages, personal loans, credit card balances, hire purchase agreements, loans from family.
Glossary: risk
An investment is normally considered to be risky if there is a reasonable chance that its value will vary significantly in the future. For example, an investment in shares is more risky than an investment in a bank term deposit. The value of shares may fall below the price paid for them while the value of bank deposits generally do not. High risk investments should only be taken on with long term intentions. You would expect a high long-term return to compensate for high risk.
Glossary: earnings
This is the money you receive from others, as payment for the use of your money.
Glossary: shares
Shares and equities refer to the same thing - a share in the ownership of a company and entitlement to any distributions (eg dividends).
Glossary: adviser
A person who sells financial advice and/or products. They include financial advisers, insurance agents, planners, sharebrokers, mortgage brokers and bank managers or agents. They may be salaried, paid a commission or have an hourly rate.