The Australian Securities and Investments Commission (ASIC) today warned investors to watch out for the different levels of risk attached to fixed interest investments.
‘The sharemarket downturn and uncertainty about property investments are generating strong interest in “safe haven” investments. 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 Executive Director of Consumer Protection, Mr Peter Kell said.
‘While failures have been uncommon, if the company runs into problems you may lose the promised return or even your capital,' Mr Kell said.
‘Right now, high return fixed interest investments offered through prospectuses are being actively marketed to investors. Sometimes the interest they offer is compared with the returns you would get from a term deposit. Many investors will want higher returns, so they need to understand that these investments, especially unsecured notes, involve higher risk with less security’, Mr Kell said.
ASIC will be looking at advertising for these sorts of products to ensure that there are not inappropriate comparisons with term deposits.
‘You can’t get 3.5% to 6% more than a term deposit without involving extra risk - so check the details of the offer closely’, Mr Kell said.
‘Some of the most damaging financial losses suffered by Australians have occurred with fixed interest products offering only 2% higher than the going rate for term deposits. But a few percentage points can be very significant in the world of lending. While such failures are uncommon, cases such as Estate Mortgage and Pyramid have caused serious losses’, Mr Kell said.
‘Higher return fixed interest investments may suit many people, as long as the risks are clearly disclosed and clearly known. Consumers should understand that different types of fixed interest products have different legal requirements, which means the returns they offer and the risks involved will vary’, said Mr Kell.
Fixed interest products are popular with consumers, so ASIC recommends four safety checks before putting your money into such investments.
1. Check the label of your investment.
Labels like ‘term deposit’, ‘debenture’ and ‘unsecured note’ indicate different levels of protection and different levels of risk. Find out which product you’re looking at. See ASIC’s summary below.
2. Read the prospectus fine print
Debentures and Unsecured Notes are offered through a prospectus. The prospectus must contain the information investors and their advisers need. Check:
- What purpose is the money being used for? (For example, if they’re borrowing for property development and the development turns sour, investors could be left with losses.)
- What security do they offer you?
- How much is the security worth? Borrower’s valuations can sometimes be optimistic.
3. Is the reward worth the risk?
Do you understand the risk? In fixed interest investments, even a fraction of one per cent extra can signal extra risk. If you can’t figure out the extra risk you’re taking, don’t invest.
4. Diversify
Don’t put all your money into one higher return fixed interest product, especially if you could not withstand any loss of capital.
|
What they’re called |
Who offers them |
Fixed Interest Risk and Return levels |
|---|---|---|
|
Term deposits |
Offered by banks, building societies, credit unions and other prudentially regulated institutions. |
Lower risk because the institutions are specially regulated. Lower returns. |
|
Mortgage debentures |
Offered by companies through a prospectus. By law must be secured by first mortgage over land given to the trustee. Loan to valuation ratio may not exceed 60%. |
Medium risk, but investors have a trustee to act for them. Accuracy of land valuation is a key issue. Typically medium returns. |
|
Debentures |
Offered by companies through a prospectus. By law must be secured by first mortgage over land or a ‘charge’ over tangible property sufficient to repay the money raised. |
Medium risk. Investors have a trustee. True value of land or other property is crucial. Typically medium returns. |
|
Unsecured note or unsecured deposit notes. |
Offered by companies through a prospectus. Not required to have a first mortgage over land nor any ‘charge’over tangible property. |
Higher risk. Investors rely entirely on the financial strength of the company. Higher returns. |
Editorial note (inserted 4 June 2003)
Fixed interest investments offered to the general public must meet these requirements. In limited circumstances, for example offers to professional investors, these products can be offered without a prospectus and these requirements may not apply. If they are offered to you without a prospectus, you can check with ASIC's Infoline by emailing infoline@asic.gov.au to see if the offer is lawful.
Editorial note (inserted 21 February 2005)
This table has now been updated. Go to our Cash and fixed interest investments page on our consumer website FIDO to see the updated version.
End of release
On our consumer site, FIDO, find out more about:
- rates of return
- Investing