Is safety same as guaranteed returns in debt products?

Not at all! Say the Timbuktu Construction Company sold you bonds that ‘guaranteed’ you a 15% interest rate. Would you buy it? Most sensible investors would not. After all, safety is not a function of the guaranteed return that the company promises to give, but whether the company itself is going to be around to return your principal.

Similarly, a Government security bought in the market may not have a guaranteed return, but it is the safest product you can ever get, since the Government will not default on its debt. This common investor confusion between safety and guaranteed returns is the main reason they fall prey to frauds and Ponzi schemes that ‘guarantee’ them a money-back and incredible interest rates. Look for safety, not for guarantees.


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