Things to Watch Out for


What is the maximum you can lose?

 

This depends on the product you are considering:

Product How you might lose money 

Bank account

Money placed in a bank account is exposed to the risk that the bank is unable to return the money to you when you want it back because of bank failure.

Banks can fail and depositors can lose their savings even in reputable and well-supervised jurisdictions. If a bank fails, ordinary depositors may suffer the loss of their core savings. In Singapore, there is a deposit insurance scheme in place. For more information, visit the Singapore Deposit Insurance website.

Life insurance

A bundled investment and insurance product such as an endowment participating policy or investment-linked plan, may produce returns which underperform your expectations. There is also the risk that the insurer fails.

Life insurance policies benefit from the Policy Owners’ Protection Fund Scheme (PPF Scheme). If an insurer fails, the PPF Scheme will cover 100% of guaranteed liabilities on all life policies, subject to caps for different types of policies. For individual life policies, the cap is S$500,000 for sum assured and S$100,000 for surrender value per life assured per insurer.

Traded products

Bonds, shares, unit trusts and ETFs have prices which move up and down. Your gain or loss depends on the price that you paid when you bought the asset, income you have received from holding the asset, and the price at which you eventually sell the asset. For bonds and shares, it may be very difficult to recover your investment if the issuer of your bonds or shares is wound up or liquidated.

If you are not an accredited investor and have suffered a loss arising from your broker's fraud or insolvency, you may claim compensation from SGX provided you dealt with an SGX broker and the loss concerned an SGX listed product. SGX maintains a fund called the Fidelity Fund to meet such claims for compensation. There is a $50,000 limit on each claim. But do note that not all brokers are SGX members.

Structured products

Structured products such as structured deposits, structured notes and ETFs are complex products. They often contain derivatives and involve multiple parties. Different factors can cause you a loss. A default by the bank holding your structured deposit, or the issuer of your structured note, or the counterparty to a derivative embedded inside your investment, may cause you to lose all the money you invested. The return on a structured product is usually linked to the performance of an underlying reference asset, for example the Straits Times Index. So if the underlying asset underperforms, you may end up with a loss.

Options and warrants

Options and warrants have expiry dates. If you fail to exercise the option or warrant or fail to sell it before expiry, you may lose the money you invested.

Using leverage

If you trade a product using leverage or margin finance, you may lose more than your initial investment amount if markets move against you before you are able to close out your position.

  

Foreign listed products – risks

Foreign listed products expose you to additional potential risks due to legal and regulatory differences between the foreign regime and the local regime. For example, there may be differing disclosure standards and investor protection.

Foreign exchange risk and tax liabilities may also be present. You should be aware that political, economic and social factors in the foreign country may influence the domestic market and impact the value of the investment. The extent of risks will also differ depending on the jurisdiction in which the foreign product is listed. Make sure you are familiar with the different risks and that you are prepared to undertake those risks before investing.

Remember to select a product that suits your risk profile. Find out what can happen in the worst case and ask yourself if you can withstand this loss. Find out more about your risk profile in building and managing your portfolio. Do make sure you understand all the information you are provided. Depending on the product you buy, such information will be contained in documents such as the product highlights sheet, key terms sheet, prospectus, benefit illustration and product summary.

Types of risks

There are risks that affect investments generally, for example, overall economic conditions, political stability, changes in interest rates or the availability of credit, all of which can affect market and general business conditions.

There are also risks which may apply more specifically to a particular investment. For example, if a company loses dominance in a key market, is hit by a scandal over defective products or there are concerns about its poor management, its share price may plunge. You can reduce these risks if you spread your money over different investments, e.g. different products like bonds and shares and different economic sectors or regions. Do read the product documentation to understand the different risks, especially for complex products like structured notes or products which are bought using leverage. 

Risk-return tradeoff

Investments that offer the potential for higher expected returns come with higher risk of loss for the investor. This is called the risk-return tradeoff. When you invest in a product offering higher potential returns, the tradeoff is that you are exposed to a higher risk of losing some or all of the money invested. If you are uncomfortable with the risk of losing money, you must be prepared to invest in less risky products which will earn lower returns.

Before you invest your money, ask yourself how much you can lose in the worst case scenario and whether you can afford this.

Unlicensed Entities

Many products and schemes, in Singapore and elsewhere, purport to offer consumers high potential profits or fast returns, perhaps at low or no risk. Not all entities or individuals offering investment returns are regulated by MAS. MAS strongly encourages consumers seeking financial services to deal with regulated persons.

Read our Consumer Alerts to find out more.

 

The above information is prepared in collaboration with the Association of Banks in Singapore, Investment Management Association of Singapore and Securities Investors Association (Singapore).