How does a PPN make a profit for its investors?

Using the same example of a $100 investment and a 10-year guarantee period, the PPN manager will use $70 of your money to buy a guaranteed investment that provides at least $100 after 10 years. That leaves $30 (minus any sales commission) to generate the profit for your entire $100 investment. The PPN manager will attempt to invest the $30 in products that will generate a high enough return that is satisfactory to you when calculated as a return on your entire $100 investment.

What is the risk of this strategy?

Keeping with the $100 example above, some PPN managers take a higher risk on your $30 to try to obtain the desired returns. Generally, a higher return is accompanied by a higher risk that you will not make a profit on your investment.

This may mean that in the worst-case scenario you still get back your $100. However, you should consider the fact that you will have to wait 10 years to get your principal back with the possibility of no profit having been earned on your investment at all. This can have a negative impact on the growth of your retirement fund.

What can I do about this risk?

To understand the risks associated with a particular PPN you should at least know and understand the answers to these questions:

  • What are the risks associated with the investments in which the PPN manager will invest your $30?
  • Based on your investment goals and assets, how much risk are you comfortable taking with your investment?
  • Are the risks associated with the investments chosen by the PPN manager acceptable to you?

Note:  The various fees associated with PPNs can make it harder for you to earn a profit on your investment.

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