Better potential returns than with shares? Debentures as an alternative investment option

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Better potential returns than with shares? Debentures as an alternative investment option

In the current environment, some private investors are looking for investment opportunities with good return potential without immediately putting their money into risky investments. The ideal profile of such investments: They should be profitable and, at the same time, low risk. Debentures, like Zurich's certificates, offer just that.

And the current "unsettled weather" in particular is making investors aware of such things: Investments in securities are always exposed to risks that cannot be foreseen. Who would have expected a war in Eastern Europe in autumn 2021? Who would have bet that the stock markets would put in such good performance in the second pandemic year? The consequences of such events are exchange rate fluctuations that can be extremely severe.

In view of such imponderables, investors have to weigh up potential return opportunities against security: Take more risks and accept losses in return, or give greater weighting to security and accept a lower possible return. There is, however, an alternative to these scenarios, which optimally combines security and returns when investing money: Debentures in the form of certificate solutions, as offered by Zurich.

Participate in performance

In contrast to shares and funds, but also to traditional debentures such as bonds, a certificate is a more recent type of security. It was first offered on the market in the early 1990s. Since then, they have evolved rapidly and are now available in countless different versions. Nevertheless, they are rarely used among private investors – unjustly, as a look at the details can show.

A certificate is a debenture (usually from a bank) whose performance depends on the performance of an underlying asset. Underlying assets can be, for example, individual shares, share baskets, indices, commodities or currencies. With a certificate, investors do not acquire ownership rights in a company as in the case of a share, but instead lend money to the issuer, usually a bank. Unlike corporate bonds or government bonds, they do not receive fixed interest in return, but participate in the performance of the underlying asset.

A basket of strong Swiss equities

As with other investment products, investments in certificates are also associated with risks. When designing its two certificates, the "CapitalCertificate" and "Zurich Invest Certificate", Zurich paid special attention to risks and the minimization thereof. Both certificates have an index as their underlying asset, which only contains Swiss blue chips (shares with a particularly high value) from various sectors with an even weighting. This guarantees a well-diversified investment and eliminates the currency risk. The companies were selected according to sustainability criteria and have a good ESG rating - a clear indication of how much a company takes into account the environment (Ecological), social issues (Social) and good corporate governance (Governance). The same criteria were used by Zurich when choosing the issuer (issuer of the certificates).

Learn more about the Sustainability Strategy of Zurich.

The advantages of certificates: Extra returns and strong protection against loss

With other investment products, such as funds and shares, private investors only profit if the securities develop positively, i.e. move into the profit zone. The two Zurich certificates, on the other hand, also protect investors to a good extent from loss if the index performs negatively. This is ensured using sophisticated mechanisms that combine attractive potential returns with a clever protection concept and profit hedging:

  • There is an extra return on the performance of the index.
  • Extensive capital protection secures the investment, even in the event of negative performance, up to a defined threshold.
  • The profit protection guarantees a minimum profit for both certificates, as soon as the performance of the index reaches a certain threshold towards the end of the term.

These mechanisms not only offer investors additional potential return, but also protect their investment in the Zurich certificates from greater loss in the event of suboptimal performance. In this respect, certificates have a clear advantage over funds, which are popular with Swiss investors. Those who invest in funds profit from the positive price development of the funds, but also participate in the negative performance. An investment in Zurich certificates, on the other hand, increases the chances of return while minimizing the risk of loss. If there is a price correction during the term, investors do not have to accept a loss up to the capital protection limit, and can participate fully in the event of a gain.

Investment product with and without life insurance

Zurich Invest Certificate with a term of five years is aimed at a broad audience. It is suitable as an innovative entry-level product for young people aged 18 and over, as their bank accounts currently yield practically zero percent interest. For "best agers" aged 50 and over, the certificate is suitable as an interim solution in financial and pension planning or as a reinvestment option for investments that are maturing. The product is also ideal for all those who want to supplement or diversify their insurance and investment portfolio. The minimum amount is CHF 10,000.

CapitalCertificate with a term of ten years is aimed at investors between the age of 50 and 65 . You benefit from the advantages of a life insurance policy (income tax-free payout, protection in the event of death, bankruptcy privileges and inheritance privileges) coupled with the benefits of a certificate investment. If the insured person dies during the contract term, beneficiaries are paid out the market value of the certificate, but at least 101% of the investment. The minimum deposit is CHF 20,000. The stamp duty of 2.5%, which is payable on the single premium in the case of a life insurance policy, is covered by Zurich.

What you should know about debentures

The debenture is a bond for which investors generally receive interest. In return, they leave the issuer of the bond, the so-called issuer, a defined amount for a certain period of time, i.e. with a fixed repayment date. In this respect, debentures function somewhat like loans, but are more flexible in terms of maturity, interest and selling them. Debentures can have maturities of up to 30 years, and they can be traded like other securities.

Anyone who buys a debenture basically grants the issuer nothing other than a long-term loan. Investors thus do not become shareholders, but instead creditors without any voting or membership rights. The issuer undertakes to repay the creditor the interest accrued and the amount invested at the end of the term.

Debentures come in various forms. The most important are:

  • Bonds, which come in a variety of forms
  • Federal bonds, also known as government bonds or public bonds
  • Certificates; available in countless versions and forms

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