A Fixed Interest Fund can be Very Risky

I always thought fixed interest funds are what it says they are. You invest your money with a fund and they put that money in fixed interest investments from which you get income based on the interest. Dumb.

I thought I could expect fixed interest on that money like I get on a bank deposit. It never occurred to me that I could lose money on a fixed interest investment.

When I queried my fund managers they told me it is actually fixed income and it can go up and down by typically +/- 6.5% over the long term depending on where the money is invested and when fixed interest instruments are bought and sold. It’s still a mystery to me as to what the difference is and why call it fixed interest when it is fixed income!

Even then it can’t be fixed income if it can go up and down. Go figure.

I think the idea is to make us all look dumb so we don’t ask the obvious questions. I’m dumb where fixed interest is concerned – I admit it.

Anyway I redeemed all my money from the fund managers after seeing all asset classes were losing money. That turned out to be a smart move.

But the other day I thought I’d take the advice of all these wealth managers and take a look at a prospectus to see what a typical fixed interest fund really is. I found a guide to fixed interest investments which stated they  include;

Examples of fixed interest investments include:
• Government bonds (you are lending the Government money)
• Semi-government bonds (you are loaning a government-backed enterprise money)
• Corporate bonds or debentures (you are loaning a company (I.e non government) money)

That makes sense to me.  All relatively safe investments which is as it should be. I even understood the Re-investment risk in the PDF. Read it yourself and you will see what I mean.

Wealth Managers keep saying you must understand the investments you put your money into. That’s why most of you loss money or didn’t you know that? 🙁 So here goes.

I read a prospectus for a real Fixed Interest Investment Fund. Yes, I know I need to get a life but…

What I found was incredible. I am using the BT Wholesale Global Fixed Interest Fund Prospectus here. But I am not intentionally singling it out for discussion. I am just using it as an example. I also read the following from the BT Wholesale Fixed Interest Fund (Australia only),

“Investment strategy
The Fund is actively managed and aims to take advantage of investment opportunities within the fixed interest market. Duration and yield curve management, sector and security selection are expected to be the main contributors to the Fund’s performance.
The Fund invests in a combination of corporate, semi-government and government debt and short-term money market securities.”

Okay, I’m fine with investing in corporate, semi-government and government debt. I’m not sure about the short term money market but I’ll let it go.

I have no idea what the “duration and yield curve management” means though.

Here’s the really scary bit,

These are investments whose value is derived from other assets, such as shares and may be used as part of the portfolio management process. Futures contracts and options are examples of derivatives.

Derivatives may be used to reduce risk and can act as a hedge against adverse movements in a particular market and/or in the underlying asset. Derivatives can also be used to gain exposure to assets and markets.”

So this prospectus is telling you the fund manager can use high risk futures and options strategies to try to make up for any losses or increase the returns to get that quarterly bonus. How adverse can a fixed interest investment be if it is supposed to be a safe investment device?

In the Risk section it states;

Derivative risk The value of derivatives is linked to the value of the underlying assets and can be highly volatile. Potential gains and losses from derivative transactions can be substantial.

So you have what you believe is a safe fixed interest investment fund but it can trade in futures contracts and options to both protect the portfolio or to make money trading them. These are not safe assets. They are very risky assets.

I expect most fixed interest funds are just like this one. According to this prospectus the fund manager can virtually take as much risk as they want to in order to make returns.

If you have any fixed interest investments I recommend you call your financial planner or fund manager and ask them where they are investing your money right now. If you are happy with the answers keep the investments. If not consider redeeming your money from fixed interest investments and putting it in a bank account for now.

One Response to “A Fixed Interest Fund can be Very Risky”

  1. […] did any of you know that your funds might have been invested in sub prime loans? Or that your “safe” fixed interest mutual fund could be “invest” in oil futures to supposedly give you a good return on your fixed […]

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