Fixed return risk queried

FIXED return investments offer low risk. Or do they?

Investors who closely watch their superannuation and managed fund statements with concern may be considering safer, alternative investments.

However, the Australian Securities and Investments Commission executive director of Consumer Protection Peter Kell has alerted investors to the risks of seeking safe havens.

“The sharemarket downturn and uncertainty about property investments are generating strong interest in ‘safe haven’ investments,” he said.

“Fixed interest investments are generally seen as lower risk, but it’s vital to remember that different fixed interest investments offer different returns – and different levels of risk.”

ASIC is investigating products that offer fixed interest returns of 3.5 per cent to 6 per cent more than a term deposit.

“Some of the most damaging financial losses suffered by Australians have occurred with fixed interest products offering only 2 per cent higher than the going rate for term deposits,” Mr Kell said.

“Right now, high-return fixed interest investments offered through prospectuses are being actively marketed to investors.

“Many investors will want higher returns so they need to understand that these investments, especially unsecured notes, involve higher risk with less security.”

ASIC recommends four safety checks before putting money into such investments.

1. Check the label of your investment.

Labels such as term deposit, debenture and unsecured note indicate different levels of protection and risk. Find out what product the investment falls into and make comparisons with the return on similar products.

2. Read the prospectus fine print

Debenture and unsecured notes are offered through a prospectus that must outline what the money raised will be used for, what security is offered and how much the security is worth. 

ASIC warns that the borrower’s valuation may sometimes be optimistic.

3. Is the reward worth the risk?

ASIC says that in fixed interest investments even a fraction of 1 per cent extra can signal extra risk.

“If you can’t figure out the extra risk you’re taking, don’t invest,” ASIC says.

4. Diversify

Don’t put all your money into one product, especially if you cannot withstand capital loss.

Westpac backs the Man

THE Westpac Bank is backing a venture by UK group Man Investment Limited to list OM-IP 130 Plus in what it describes as one of the first in a new generation of guaranteed return funds.

A prospectus has been issued that promises a guaranteed return through Westpac of $1.30 for each $1 share held to the maturity date.

The fund aims to generate returns of about 15 per cent per annum.