Author
Abstract
Purpose - – In financial planning, customers are typically confronted with choosing a premium payment scheme when investing in a mutual fund, which is often equipped with an investment guarantee to provide downside protection. Guarantee costs may thereby also be charged differently depending on the provider. The paper aims to investigate the impact of the premium payment method on different performance measures for a mutual fund with an investment guarantee. Design/methodology/approach - – The paper compares a fund with annual and upfront premiums as well as constant guarantee costs versus the guarantee price as an annual percentage fee of the fund value, always ensuring that the present value of premium payments is the same for all product variants. The paper further studies the relevance of the guarantee level and the contract term. Findings - – The results emphasize that even though the present value of premiums paid into the contract is the same, the type of premium (upfront versus annual) as well as the type of guarantee cost (upfront versus annual fee) has a considerable impact on the performance. Practical implications - – Providers can thus make a product more attractive for consumers by individually adjusting the premium scheme depending on their preferences and by making the resulting risk-return-profile transparent, while keeping the other contract characteristics unchanged (e.g. extent of the guarantee). Originality/value - – To date, there has been no comprehensive analysis with specific focus on the impact of different premium payment schemes (in particular with respect to savings premiums and guarantee costs) on risk and return of a mutual fund with otherwise given contract characteristics such as the underlying fund strategy and the investment guarantee, even though the premium scheme itself can already have a considerable impact on the terminal payoff distribution and thus risk-return profiles. In addition, such an analysis can provide important information for consumers and providers in designing and choosing attractive products by simply adjusting the premium scheme (if possible) instead of or in addition to changing other product features.
Suggested Citation
Nadine Gatzert, 2013.
"On the relevance of premium payment schemes for the performance of mutual funds with investment guarantees,"
Journal of Risk Finance, Emerald Group Publishing Limited, vol. 14(5), pages 436-452, November.
Handle:
RePEc:eme:jrfpps:jrf-04-2013-0030
DOI: 10.1108/JRF-04-2013-0030
Download full text from publisher
As the access to this document is restricted, you may want to search for a different version of it.
Corrections
All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:jrfpps:jrf-04-2013-0030. See general information about how to correct material in RePEc.
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
We have no bibliographic references for this item. You can help adding them by using this form .
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emerald Support (email available below). General contact details of provider: .
Please note that corrections may take a couple of weeks to filter through
the various RePEc services.