Understanding capital guarantees and risk-free investments

In the realm of investments, understanding capital guarantees and risk-free options is crucial for securing your financial future. While traditional savings accounts and term deposits offer security, Treasury Bills (T-Bills) present a compelling alternative, combining safety with potential for higher returns.

What is capital guarantee?

Capital represents the total amount invested in a financial product, including initial and subsequent deposits. When ending an investment, you may:

• Recover an amount exceeding the invested capital, realizing a gain or "capital gain."
• Recover less than the invested capital, incurring a loss or "capital loss."

Capital guarantees ensure that investors will recover at least a portion of their initial investment, providing peace of mind in uncertain economic climates.

Dimensions of capital guarantees

Proportion of guaranteed capital‍

Capital can be guaranteed fully (100%) or partially (e.g., 90%, 50%).

Temporal horizon

‍Guarantees may apply at all times or only at specific moments, such as at the end of the investment term.

Guarantor

‍Guarantees can be provided by banks, insurance companies, or specific funds like the FGDR (Fonds de Garantie des Dépôts et de Résolution).

Traditional safe investments: savings accounts and term deposits

Savings accounts and term deposits are traditionally considered low-risk investments. They offer capital guarantees, often backed by institutions like the FGDR, which ensures deposits up to €100,000 per person per bank in case of bank failure. These investments provide security but may offer limited returns, especially in low-interest environments.

Treasury Bills: a superior alternative

Treasury Bills, or T-Bills, are short-term government securities that provide a secure, flexible investment option. They are backed by the full faith and credit of the government, making them one of the safest investments available. T-Bills offer several advantages:

Security

‍Like savings accounts and term deposits, T-Bills are considered risk-free due to government backing.‍

Liquidity

‍T-Bills can be easily bought and sold in secondary markets, providing quick access to funds when needed.

Competitive returns

‍T-Bills often provide higher returns compared to traditional savings options, especially in fluctuating economic conditions.

The role of the risk-free rate

The risk-free rate represents the return on an investment with virtually no risk. While theoretical, T-Bills are often used as a proxy for this rate due to their safety and liquidity. Central bank policies, such as interest rate adjustments, directly influence this rate, impacting the returns on T-Bills and other safe investments.

Conclusion

In an uncertain economic landscape, Treasury Bills offer a secure and potentially more lucrative alternative to traditional savings accounts and term deposits. Their combination of security, liquidity, and competitive returns makes them an attractive option for risk-averse investors. At Velesios, we are committed to helping our clients navigate the complexities of investment choices and maximize their financial potential.