No 'free lunch'

Q I recently received a number of telephone calls from a financial services firm in Singapore who were promoting a 'new and dynamic' investment fund. The firm was offering a guaranteed rate of interest of 10.5% (sterling) or 8.5% (US$) and my capital was guaranteed. Within a few days, I received a glossy brochure on the company and fund they were promoting. The contents seemed to confirm the stature of the company. How can I check the integrity of the fund and company promoting it?

A Bearing in mind that sterling interest rates are less than 5% and US$ interest rates are 2%, the simple question is "how can anyone guarantee a rate of return more than 5% than the bank base rate"?

This type of scenario is now unfortunately very common. Starting from the infamous Nigerian scam letters normally sent via the Internet from people claiming to share their multi-million inheritance with you to more sophisticated scams from supposed investment firms. If these returns were really guaranteed, then why can your bank not offer a similar return?

The people making these telephone calls are very clever. They have a great skill of drawing unsuspecting people into actually believing the nonsense they are telling you and ultimately giving away your bank details so that they can drip your account dry.

If you receive any such calls, then my advice would be simply to terminate the call immediately. If you do wish to pursue the idea, then checking if and how the investment company is regulated is your first task. This can be done independently by contacting the regulator in the jurisdiction that the fund is supposedly 'registered'.

The promoters of these types of products try to portray them as no-risk investments, but there is no such thing as a free lunch. Invariably the companies offering such investments are based in the Bahamas, Grenada or other fantasy holiday destinations.

They are invariably poorly regulated jurisdictions. Often there are no protection laws in these territories, so if the company goes bust, clients have little or no chance of redeeming their funds.

We are regrettably all driven by greed, a greed to obtain as much as we can and sometimes we are blinded of common sense in our quest for the highest returns. Returns of 10.5% can be achieved but not without risk. Some funds have made in excess of 50% in the past 12 months, whereas others have lost equal amounts. They both therefore carry a high level of risk.

There are many sound investment opportunities available to those looking for better than bank returns. Many carry capital guarantees and guaranteed returns. But the guarantees are not headline-grabbing 8.5 or 10.5%. They are far more conservative - typically around bank rate, i.e. 3-5%.

These investments are run out of recognised jurisdictions, such as the Isle of Man, the Channel Islands and Luxembourg. These territories have solid investor protection legislation, which all investment companies situated there have to subscribe to.

So take advantage of the opportunities available to enhance your returns but do so carefully and ensure that your hard-earned capital works a little harder and is not squandered by some fanciful promise.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Malta exchange control regulations must be observed. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.