Saving and investing

Tracker bonds

In this section you will find information on tracker bonds to help you understand what they are and questions to ask if you are considering a tracker bond.

• What is a tracker bond?
• Are tracker bonds risky?
• Is a tracker bond right for you?
• Questions to ask
• An example of how a tracker bond works

Tracker bonds are fixed-term investments where typically the bulk of your money is invested in a deposit based account and the rest is invested in the stock market.

The part that is invested in the stock market will offer a return based on the performance of a stock-market index or mix of indices. You will usually have to invest a minimum of €5,000 and the term is fixed for between three and six years. You will have no access to your money during this time.

Are tracker bonds risky?

Tracker bonds are usually considered low-risk investments because many of them offer 100% capital security once you leave your money invested for the full term. This means you are guaranteed to get the original amount of money you invested back. However, even if you get all of your money back, you may have lost money because of the impact of inflation.

Generally, the lower the risk, the lower the level of return on your investment. The rate of return usually depends on the growth of the stock market which the bond tracks. There will usually be a limit on the amount of the stock market growth you are allowed, for example, a maximum of 50% of the growth.

The return tends to be higher in the case of tracker bonds that don't give you 100% capital security. In some cases, the bond may also promise a minimum return (equivalent to a low fixed deposit rate of interest) if this turns out to be more than the growth achieved at the end of the investment term.

Is a tracker bond right for you?

Tracker bonds may suit you if you want to:

• invest a lump sum and don't need access to any of it for a set number of years
• protect all or most of your investment
• take only a small risk on the return you earn.

The risks with these products include:

• the risk of poor returns
• inflation risk to your capital
• an element of capital risk if the bond is less than 100% capital secure.

Tracker bond charges are built into the product at the start, so they are reflected in the promised minimum return (if any) and the maximum growth allowed on the bond. No further charges apply during the term of the investment.

Questions to ask

• how much of my original investment is guaranteed to be repaid when my bond matures?
• do I get a promised minimum return?
• how is my return calculated?
• does the bond allow for full growth of the index it is tracking?
• what is the 'cap' or maximum amount of the index growth I can get?
• are there any other limits on the returns I could get back?
• what charges do I have to pay?
• does the term suit my timescale?

Under the Financial Regulator's Consumer Protection Code (pdf), your provider must give you a ‘key features' document, setting out the important details of the product, including how the tracker bond works, where your investment goes, if and how you can get access to your investment and any tax that applies.

An example of how a tracker bond works

This is a simplified example to show how the return on a tracker bond could be calculated and is not intended to represent any specific tracker product.

You invest €10,000 in a five-year tracker bond with 100% capital security. It promises you a rate of return after five years of 60% of the rise in the FTSE100 index.

After five years, the FTSE100 has risen by 30%. This example shows what you could expect to get back. The return of €1,800 is roughly equal to a savings rate of 2.7% a year, after tax.

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