Considering Investment Linked Saving Plans
Investment linked savings plans are basically what the term implies—saving accounts or plans with earnings dependent to the performance of their investment product. It can offer account holders amazing financial gain. On the flipside, it can also offer the account holder nothing; it really depends on the performance of the investment product, something you have no control over.
This kind of investment option does open up a number of benefits usual investment options cannot provide. For instance, even if the investment does not perform well, the account holder stands to get his principal deposit back. As you may know, this isn’t the case with usual investments, wherein you can lose all your assets if your investment product does not perform well. Of course, the option isn’t foolproof, at least in terms of speculative earnings. In terms of security, a fixed deposit account or even a saving account is the better choice. But in the end, it is a viable financial savings option, especially for those looking for serious returns from their savings.
So what are the factors you should consider when opening an investment linked saving plan?
First off: consider the investment product linked to your account.
The investment product of an investment linked savings plan actually differs from financial institution to financial institution. For instance, some banks weight the performance of the investment across various sectors. In one bank in Singapore, the performance of the investment is weighted across gold, property, and developed and emerging equity markets equally. This makes the investment less predictable, giving the product more room fail—but, at the same time, more room to succeed as well.
Some banks, on the other hand, will allow you to choose a specific sector. In another bank in Singapore, an interested account holder can choose from four different sectors: specifically, foreign currency, gold, bond, and stock market. With the investment concentrated on only one sector, the account holder can choose intelligently according to current market and financial indicators.
A good question that may rise from these facts: which is better, the sector-specific saving plan or the general investment linked saving plan? Sector-specific plans are ideal for those who are already adept in the specific area, only because this gives them an edge when it comes to personal forecasts. Otherwise, the general saving plan allows for a more adequate buffer when it comes to investment performance. A general-sector investment is more different to predict, but take note that predictions and forecasts during the term of the plan are already useless.
Another important factor to consider here is the maturity date.
The maturity date is the time when you can withdraw your deposits and your earnings, if any. Unknown to many, the specific market indicators only matter depending on your decision. In general, the market figures now would not really be relevant if you plan to open a long term investment linked saving plan. For instance, in America, those who made long term investment commitments in 2007 (before the economic crunch reared its ugly head) lost speculative earnings since they thought the economic bubble wasn’t going to burst.
This doesn’t mean you should not consider market forecasts and indicators. In fact, you should at least be knowledgeable about the recent financial trends and movements in your sector. However, this also says that it’s a completely unpredictable financial option.
Terms and agreements
Different banks and financial institutions have different terms, so it’s wise to take note of these.
Although the general concept of this plan is to give you earnings from the floating interest and performance of your investment, some banks offer a minimal interest rate on top of this. This set up is not the usual set up; in fact, it’s probably rare. But just the same, it’s a viable option to look into, especially if you’re looking for a more stable saving option.
Some banks also have a specific maturity period for the saving plans (usually six months), with the longer plans having different terms. Make sure the terms of your plan remain to be reasonable vis a vis your plan’s maturity period.
The redeem clause is also an important factor to look into. This clause will allow you to withdraw your savings before the pre-determined maturity date. Technically, this has nothing to do with how much you earn and how you earn it. However, in case you suddenly need to access your funds, this can be lifesaver. Look for banks that allow a no-deduction pre-maturity date withdrawal, although a minimal deduction is good enough.
In the end, it’s really matter of you deciding why you need to invest. What are your financial plans? How much do you need to earn? Are willing to risk the money you could earn from a more stable saving plan? Make sure your investment objectives are clear and you would do no wrong.