Increasing demand for investment security

Press, 27 June 1989, Page 29

Increasing demand for investment security

Following the 1987 sharemarket crash secure fixed interest-rate investments have markedly increased in popularity. Although considered to be somewhat dull during the sharemarket’s good months, secure fixed in-terest-rate investments quickly proved their worth when financial markets started to go wrong.

Almost two years on, these investments are still gaining momentum. There are two important reasons: First, people are not willing to “gamble” > with their life’s savings and, second, fixed interest rates offer a definite return which is more tangible than returns being offered by many sophisticated managed funds. Kiwi Bonds, especially, have enjoyed considerable prosperity since the

sharemarket crash. First launched in November, 1985, Kiwi Bonds offered reasonable interest rates over two and four-year terms. Moreover, they were Government guaranteed, a feature that is a stronger selling point now than it was in 1985. When the old series of Kiwi Bonds closed on December 3, 1988, interest rates were 11.5 per

cent for the two and fouryear terms. Two days later, a new series of Kiwi Bonds opened with additional investment options. Additional terms; six months and one year, have been added and withdrawal before maturity conditions have been change. The old Kiwi Bond contract demanded seven day’s notice, and a penalty rate of six per cent off the interest rate ap-

plied. The investment had to run at least six months before any withdrawals could be made. With the new contract, seven days notice still applies, but before maturity withdrawals can be made after only one month and the penalty rate is reduced to two per cent.

Interest rates are now paid quarterly for those wanting to use the interest on their capital. Alternatively, interest rates can be compounded to lift the total amount available at the end of the term.

Brian Lang, chief manager of the Reserve Bank registry department, says many of the changes were made as a result of a Heylen research poll.

“Kiwi Bond holders were asked about a number of aspects of the investment. This helped us design a new prospectus

and aim advertising where it might be more effective.

“The new prospectus is designed for easy reading. The layout separates the information from the less comprehensible, terms of issue, which is a legal requirement for any prospectus.” This year Kiwi Bonds had another boost in popularity. Since last December $260 million has been invested. This compares with the $95 million invested in an entire year up to March 31, 1988.

Mr Lang says the big increase in investment dollars is partly because of the recent changes to Kiwi Bonds and partly because of problems with various financial organisations. Advertising has also been a factor. “The Government guarantee is also very attractive especially now that a number of investments have lost the Government guarantee component.

“The Government guarantee factor is especially important to retired people who would constitute the majority of Kiwi Bond holders. These investors do not usually have the means to recover capital through bad investments.” Although Kiwi Bonds carry a Government guarantee, they still offer attractive interest rates. At present, rates vary between 11.5 and 12.5 per cent depending on the amount invested and the term. The minimum investment is $lOOO and the maximum is $250,000. An interest rate incentive is offered on investments of more than $5OOO.

As with any investment, the first requirement is to read a prospectus which is available from PostBank, New Zealand Post, any registered bank and most sharebrokers and accountants.