Caution needed on protected equity loans
Protected equity loan products allow investors to gain leveraged exposure to the sharemarket with a built-in safety net if their portfolio stocks take a dive. Investors can't lose their base capital but can keep dividends and capital gains. They also benefit from tax concessions with 100 per cent deductibility for their interest and capital protection costs. But not all financial planners and tax experts are convinced that these products are the best way to achieve a solid investment return. They say their high buy-in costs and uncertainty about when the Tax Office might change the deductibility treatment make them unattractive. Experts say the costs can run as high as 17 per cent in addition to paying loan interest when investors pay for embedded put options to protect the products' downside.