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August 04 newsletter
We decided to update our information on debentures, because of a recurring comment in the marketplace which goes something like this: "it's not a matter of if a finance company goes belly up, it's just a matter of when".
We thought it might be a good opportunity to cut through the marketing hype to point out a few things that you should consider when assessing your debenture investment.
The first step is to understand what these finance companies are all about. Essentially, they borrow funds from you, the investor, and then lend those funds on to borrowers. They make their money by charging a higher interest rate to the borrowers than they pay to you. They stay in business by ensuring that their borrowers can repay the loans, so that, in turn, they can repay the sum of money you invested.
There are about 30 finance companies belonging to the Financial Services Federation, and even more that don't. You can expect an enormous variety in what they do, how big they are and, ultimately, how able they are to protect your capital and pay the interest they promise.
We recommend that investors supplement the information provided by their adviser with a little of their own research.
The two key documents to find, read and understand, are the investment statement and the prospectus.
Some key things to consider include:
What does the Shape of Money recommend?
In summary, if you decide to invest directly, we recommend that
you read the investment statement and the prospectus and, at the
very least, carefully consider the above points.