Common sense dictates that an investment with little or no risk will yield little or no gain.
But in recent years, fund managers and banks have tried to go against such a theory by introducing capital guaranteed funds.
Most of these funds guaranteed an investor's principal investment (meaning zero risk), yet promised the possibility of returns by investing part of the funds collected in stock markets.
Not surprisingly, capital guaranteed funds were extremely popular.
But the only catch was this: Most were structured in a way that typically require an investor to lock in his investments for three to five years.
With markets now rallying on the back of an economic recovery, many investors are no longer willing to freeze their funds in such a fashion.
This is why banks and fund managers here are rushing to put out innovative new products known as 'trigger funds'.
Following the successful launch of the first trigger fund in Singapore - DBS Target 120 - market leaders such as UOB Asset Management and SG Asset Management have also launched similar products.
UOB's product is called Goal 120 , while SG's is known as the Trigger Capital Guaranteed Fund.
Is the new fad worth checking out?
Capital guaranteed but not length of lock-in
All trigger funds are based on a similar idea.
An investor puts in a sum of money, which is guaranteed to be returned intact at the end of a time period lasting between five and 10 years.
The return in the first year is very high, typically 10 per cent.
This 10 per cent is paid to the investor in cash, no questions asked, and is a major selling point of such funds.
Subsequently, in a fund that has a maximum tenure of 10 years, the returns from the second to the ninth years are calculated based on a variable factor, such as the performance of a number of stocks or selected stock markets.
Here is where the second selling point of trigger funds comes in. Unlike traditional capital guaranteed funds which lock investors in for a fixed number of years, trigger funds can terminate before their maturity date.
This happens when the fund has accumulated enough returns to cross a 'trigger point'.
For example, the trigger level of SG's Trigger Capital Guaranteed Fund is 15 per cent. So once the fund gains 15 per cent, the principal amount invested, plus all gains, are returned to the investor.
With the fund already gaining a guaranteed 10 per cent in the first year, investors can get their money back - plus gains - in as short a time as two years. Much depends, therefore, on how well the fund performs after the first year.
For SG's fund, the returns from the second year onwards are linked to the average performance of the six worst performing stocks in a basket of 30 blue-chip stocks.
A fixed formula {5% (25% x (average performance of the least performing stocks))} is applied to calculate the exact payout for that year.
So if the average performance of the poorest performing stocks is minus 10 per cent, then the payout in the second year is 2.5 per cent {5% (25% of (-10%)) = 2.5%}.
To increase the fund's chances of hitting its 'trigger point', the lowest payout in any year is zero.
There is also a lock-in payout feature which states that the payout from year three cannot be lower than that of year two.
This means that if the investor gets a payout of 1 per cent in the second year, the investor will be ensured a payout of at least 1 per cent in the third and subsequent years.
The worst-case scenario is that the six least performing stocks in each year generate a very large negative return.
If this happens, the payout is zero every year. The investor gets his money back after a maximum wait of 10 years. Since he received 10 per cent in his first year, his return is exactly 1 per cent per year.
Mr Harry Krkalo, SG's senior vice-president for structured products Asia, excluding Japan, said that the product was a combination of all the features investors were looking for.
These were: A high fixed coupon, a potentially high, uncapped positive returns and a real chance at having the fund mature well before the final maturity.
'The response to the first launch in Hong Kong was overwhelming and subsequent issues indicated that investors were exceptionally receptive to the structure,' he said.
He added that the product was also aimed at the more conservative investor.
HSBC said that investors would need to have a definite view of the global market and how it would perform in the short to medium term.
'They, however, are prepared to stay invested for 10 years if the target return is not achieved,' HSBC said.
DBS would say only that its Target 120 fund was 'pretty popular', declining to release actual sales figures.
But some reports have estimated that the fund raked in almost $500 million - which puts it among the most successful fund launches to date in Singapore.
Other options may give a run for your money
Are these new products really as good as they sound?
One way of looking critically at the product is to compare it with alternatives for the conservative investor.
The first alternative for the conservative investor is the fixed deposit.
A typical basic fixed deposit account pays a fixed amount of interest for the investment, of which the minimum is $1,000.
DBS pays a rate of 0.75 per cent for money that is placed in the account for two years and 0.625 per cent for a year.
Compared with the trigger fund, the deposit gives less return than even the 1 per cent worst-case scenario for the trigger fund. Still, it ensures that you get your money back at the end of two years.
But since investors buying into the trigger fund could be locked in for 10 years in the worst-case scenario, a comparison with another 10-year financial offering would give perspective to the trigger fund.
For example, 10-year Singapore Government bonds currently pay an annual interest rate of about 3.6 per cent.
Given the contrasting outcomes that could occur, the biggest bugbear, therefore, is the uncertainty of the lock-in period.
Mr Jonathan Lee, 30, a sales executive who considers himself a 'conservative investor', said however remote the possibility that his money would be locked up for 10 years, the uncertainty of the lock-in time would make him think twice before investing.
'True, the rate of return of 10 per cent in the first year is attractive but what if my money is really locked up for 10 years?' he said.
Mr Chris Firth, chief executive of wealth management firm dollarDEX, has another view.He said that if you are willing to tie your money up for a maximum of 10 years, then you really ought to be considering putting the money in an equity fund, which is more straightforward.
'If you put your money into an equity fund and have the benefit of leaving it there for 10 years, I am pretty sure you will come out better than the 1 per cent you will get,' he said.While he admits there is a possibility that markets could crash, he reckons that over a 10-year time horizon, the probability of incurring losses on an equity fund is low.
You know it’s a trigger fund when...
• There is a guarantee of a high payout in the first year. The payout is usually about 10 per cent and is given in a cheque, no questions asked.
• The payout scheme from year two onwards may be a complicated formula that looks like this - [5 per cent 25 per cent x (average performance of the six worst performing stocks)].
• The fund moderates the risk of having your money locked in for a long time, usually 10 years, with the potential of a high level of returns, which usually runs into double digits.
It promises to give your capital plus returns back when the fund has accumulated enough returns to cross a 'trigger point', such as 15 per cent for SG's Trigger Capital Guaranteed Fund.
