Minibond Series 6

This blog was first posted on 16 July 2007

Dear Mr Tan
My risk-adverse retired father has always placed his funds in fixed deposits as they are risk-free.

I saw the advertisement in today's papers for the minibonds series 6 which pays 5.1% for 5 3/4 yrs.

These bonds seem to be relatively low risk and the returns appears good. Is there any catch? I'm considering asking my dad to transfer his funds to buy this since his fixed deposit is maturing. Can you advise?

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REPLY:

The Minibond series 6 pays 5.1% p.a. for 5 3/4 years. This payment comes from the principal invested in the fund, and is NOT the same as the actual return earned on the fund.

Here are the information obtained from the advertisement.

1. The fund is invested in credit-linked securities that are rated AA at the time of issue. These credit-linked securities have a high risk than bonds with the same rating.

2. The Notes are not principal guaranteed or principal protected. There is a likelihood that the investor may not get 100% of your principal on the maturity date. This is likely to happen, as the fund pays out more than what it earns and has to incur heavy expenses (not disclosed) for distributing and managing the fund.

3. If there is a Credit Event happening to any of the 6 financial institution before the maturity date, the investor may lose part or substantially all of the invested amount.

You need to read the prospectus carefully to understand the definition of the Credit Event and the likely amount that can be lost. (I believe that this is difficult to assess, even for an expert like me).

4. There is a provision for the Issuer to redeem the Notes earlier, on or after 3 years from the Issue Date. This right is likely to be exercised, if interest rate has fallen. The investor will have to re-invest the money to earn a lower interest rate.

5. You are advised to read the prospectus and understand the investment risks and the terms. If you do not, you cannot complain later if the investment turn out to be bad.

My views: Do not invest in this product, as it has much uncertainty and the return is not attractive. It is better to invest in a government bond to earn about 3.5% per annum over the next 5 years.

You can read the following:

Structured Products - how they work
Avoid Structured Products
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