Hundreds of thousands of Canadians rely on mutual funds to help them save money for their retirement. While mutual funds are an important tool in one’s portfolio, some just can’t stomach the ups and downs and potential of loosing capital.

Good alternatives are Principal Protected Linked Notes or Guaranteed Market Return GICs. These are designed to guarantee the investor’s principal as well as provide growth potential. They are innovative financial product that combines key investment characteristics of both stocks and conventional bonds. The key distinguishing feature of these investments is that the principal amount – your original investment – is 100% protected provided you hold the Note to maturity usually 3 to 7 years depending on the note.  Some also guarantee the first year interests. These notes are not locked-in like a GIC.

The return of principal at maturity makes them similar to bonds. A conventional bond also repays the full principal amount at maturity, but earns a return through periodic pre-determined coupon payments over the term of the bond. Although linked Notes may pay pre-determined periodic coupons, it has the potential to earn a variable return based on the performance of the underlying stocks over the term of the Note, paid sometimes periodically but generally at maturity.

Benefit at a glance

  • Guaranteed principal. Add equity exposure with no risk to principal by holding the Notes to maturity.
  • Excellent opportunity for diversification. Linked Notes offer access to investments in markets that investors may find difficult to access through conventional means.
  • Management fees. Most Linked Notes do not charge annual management fees, making them a cost-effective alternative to managed products.
  • Flexibility. Because you’re not “locked in,” the Notes may be sold prior to maturity at the prevailing market price. Our favourite notes are issued by CIBC World Markets.  *They currently maintain a secondary market, but reserves the right not to do so in the future at its sole discretion without providing prior notice to investors.
  • Tax-efficient. Outside of registered plans, investors generally do not have to include the interest income for tax purposes until it is received. If the Note is sold before maturity, you may be entitled to treat any gain as a capital gain for income tax purposes.
  • Are Principal Protected Notes right for you? They may be suitable for investors who:

  • Prefer the safety of conventional bonds and GICs, but seek higher returns than those typically associated with such investments.
  • Wish to participate in the potential growth of the equity markets, but do not want to risk losing principal investment.
  • Want the flexibility to sell prior to maturity if necessary.
  • Would like to include fixed-term investments as part of their portfolios.
  • Are seeking cost-effective investment alternatives.
  • Not all Linked Notes are created equal. We can help you select an appropriate note and determine whether or not these investments are suitable to your situation.  A series of new notes are coming available this week.  Please let us know if you want to look at some of these issues.