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protected loans/managed funds advice please

Discussion in 'Managed Funds & Index Funds' started by vivianne, 27th May, 2007.

  1. vivianne

    vivianne Member

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    Wollongong
    Hi I have some experience in stock market investment, but now find myself with a smallish pot of shares in St George.(post property settlement) I decided initially to use this , or some cash to take out a margin loan.
    However a visit to an FP has encouraged me instead to consider a 'protected loan'. I am thinking of about $200,000 - I can prepay a years interest.

    I am a 49yo woman with three late teens kids, income around $70,000 next year.

    How does all this work - my understanding is that I can claim 75% of the interest as a tax deduction , and I am attracted to this because as a sole parent on a low taxable income, my three daughters should be eligible for a Youth allowance. This will be of great help to them.

    Does this sound like the way to go? What is the worst thing that could happen? What other alternatives might there be like this? It all seems pretty expensive to go through the FP - I guess I want to set and forget something, I do not want to stress about margin calls.

    Any ideas welcome!!

    Thanks in advance
    Viv
     
  2. handyandy

    handyandy Well-Known Member

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    Hi Viv

    I suggest you need to supply more info re the investment that is tied to that loan and also what the 'protection' is

    Generally these sort of loans aren't margin loans but are loans that are intrinsically tied to a managed fund such as one of the Macq bank stable of offerings.


    I would suggest that regardless of the protection the investment must still perform and you ust have a reasonable expectation of getting returns over and above the cost of funds (interest).

    The following link is a discussion about one or more of these products not preforming

    http://www.invested.com.au/7/macquarie-newton-asia-funds-12992/

    Personally I have invested in one of these products and feel that it really has not performed to even offset the cost of funds and am looking at cashing out this MF.

    Cheers

    PS you can also source these products through investsmart.com.au and in tis way you will be refunded any entry fees and I believe also the commissions on the loan and receive trailing commissions over and above about $400.
     
    Last edited by a moderator: 27th May, 2007
  3. vivianne

    vivianne Member

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    fusion fund

    thanks HandyAndy,

    The fund suggested was Macquarie Banks fusion fund - my understanding is that the worst thing that can happen is that I would lose any interest I have paid, but that the capital would be untouched. (that is, capital is protected)

    Sorry for sounding like a dill, but that is that capital ostensibly mine? Provided I slowly pay off the principal, is that what that means?

    Can you give me any advice as to alternative choices - given you are not happy with this direction ?
    Will check out the link you sent. Much appreciated!

    Viv

     
  4. bundy1964

    bundy1964 Well-Known Member

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  5. EMP

    EMP Active Member

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    Basically, yes, the risk is that you lose all the interest you pay for no (or too little) gain at the end, but I think it's also worth considering that it may be difficult to exit the fund. The capital protection only applies if you hold units until maturity. So, say you borrow $200K and in the first year it drops by 10%. You would then have a difficult choice to make: either come up with $20K of your own money to repay the loan and get out or continue paying interest for the rest of the term and hope that it improves. It it doesn't improve then you'll ultimately have the loan repaid for you, but you will have lost even more in interest. That's the worst-case scenario, but I think the greatest risk is that it simply doesn't perform well enough to make it worthwhile (compared to a regular managed fund). Also, since the Fusion is all about growth you're not likely to get much of a distribution before maturity. So you're more or less committing to paying the interest out of your own pocket for the term. Macquarie also have a similar fund that's all about income (no growth) - Geared Equity Income Fund.

    Now, on the bright side, yes, it is very much set and forget and if the underlying funds do perform well then the returns are impressive. So, having said all that, I have some units in the Fusion fund myself (from the last offer), because I decided that the risks are acceptable to me.

    If it's expensive to go through the FP you might consider InvestSmart, which will rebate all the upfront commission and even some of the trailing commission. Whether it would be ethical to do this when your FP is the one who told you about the fund is a question I leave to you :) - I'm just letting you know of the possibility.
     
  6. vivianne

    vivianne Member

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    Thanks Bundy, the link was fine.
    I think I would easily pass the assets test - post divorce I have the house ( not counted) and mebbe $50K shares and a daggy car, three teens (no value!). But the FP did not mention checking eligibility at all. It was first visit though..
     
  7. vivianne

    vivianne Member

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    Also, {sorry I sent previous msg too quickly}, my dilemma is that my amateur friends and I are of course worried that a margin loan would be riskier in case of a correction.
    Anyone have a crystal ball on that one? Would I be nuts to proceed with (eg a St George) Margin Loan in the present climate? I could use shares as collateral for the loan, and could handle margin calls, but is there a high risk that I am going to throw money away.?
    I am so impressed with the advice here already! For someone who is flying solo and new at this, it's just great.
    Thanks....
     
  8. vivianne

    vivianne Member

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    Thank you EMP,
    You said - I think the greatest risk is that it simply doesn't perform well enough to make it worthwhile (compared to a regular managed fund).

    How long is the term ? I am so new, i did not realise that I might be locked into this thing for years and years?

    Can I get tax relief from a regular managed fund ? Otherwise I might as well reconsider the margin loan thing, but I am worried about margin calls in this climate (doesn't this run have to end like they always do!), although apparently I can gear it so I am at less risk of a call. Another thing to learn about!
    Could someone just tell me what to do?!!! I have scouts out looking for a crystal ball.... but in the meantime I am seriously trying to get smart about money
     
  9. EMP

    EMP Active Member

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    As far as the fixed term goes, I was talking specifically about Fusion. There might be capital protected products out there with no fixed term - I don't know. The Fusion funds that I invested in had a "capital protection date" that was 5 years 7 months from the inception date. You'll need to check the PDS as it might be different for the current offer. You're not "locked in", strictly speaking - you can sell at any time. The only issue is that you're only "capital protected" on the "capital protection date", so if the value of the fund falls (which is exactly when you might want to sell it!) then you'll have to make up the difference yourself to get out. Because of this I'd say there is a bit more commitment involved than with a regular fund and I personally would not have invested in it if I didn't plan to keep the units for the whole 5.5 years.

    The interest on a margin loan for a regular managed fund would be tax-deductible as well. You might want to set up a spreadsheet and play with the numbers to see how much you can comfortably borrow to keep the risk of a margin call acceptable (eg. "if I gear to x% then the shares would have to fall by y% for a margin call"). Then consider how much the fund would be likely to earn over the same period as the Fusion fund, if you reinvested all the returns (as they are reinvested in the Fusion). You can then weigh up the risk/return of both and decide whether the extra commitment of Fusion is worth the (potential) extra return.

    A bit of a disclaimer: I'm just your regular investor on the street and have no particular qualifications to offer advice, so I'm not advising anything. :) Well, maybe one thing: if, at the end of the day, after all your research, you're still not sure that you fully understand this fund, then it might be better to pass. There'll always be other funds.
     
  10. vivianne

    vivianne Member

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    Thanks EMP,

    that info is so invaluable - 5+ years is a very long time so I am leaning towards a margin loan again, perhaps I should talk to a mortgage broker , gear a ML pretty conservatively and see how it goes for a year or so.
    How bad could that be?

    As for setting up a spreadsheet, ahem, that is ever so slightly over my head.

    apparently, the Fusion interest is only 75% tax deductible, given that, plus the fees and charges, I need to take out an even bigger loan to reduce my taxable income for this year.
    So, I have gone off the Fusion type loan again.
     
  11. Nigel Ward

    Nigel Ward Team InvestEd

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    Hi Viv and welcome!

    In my view protected loans are generally very expensive compared with the protection they provide. I really think the only person who wins here is the planner. That's not to say they're not giving you advice which matches your disclosed risk profile etc...

    In my view, the best protection is:

    1) buy the right shares; and
    2) don't over extend yourself when borrowing.

    Sounds simple right? Of course it's not that easy...but it's also not that hard either.

    Nobody really knows exactly where we are in the share market cycle except to say we're perhaps closer to the finish than the start.

    If you're concerned about investing substantially now, why not look at an instalment gearing program. I.e. you invest say $200 per month and your margin lender matches that with their $200 so that instead of $200/month being invested you have $400. With your current shareholdings held as security against the loan plus the new shares/funds you invest in this could be a conservative and sensible way to ease yourself into the market and slowly increase your Loan to value ratio to something you're comfortable with.

    Let me say it again, highly structured products and capital protected loans are just ways for the investment banks/issuers to exploit people's nervousness with shares compared with say property. I say that having worked on deals for some of the banks issuing these products. :rolleyes:

    Good luck with it.
    Cheers
    N.