Bonds

What are bonds? What is the maximum amount you can lose? What is the worst that can happen when you invest in bonds? Are bonds suitable for everyone? What you should watch out for - What makes bond prices move? What can cause me to lose money? What are government bonds, corporate bonds, bond funds and bond ETFs? Key questions to ask before investing in bonds

What are bonds?

Bonds are a form of borrowing. They are debt securities issued by borrowers such as governments or companies seeking to raise funds from the financial markets. They are also known as fixed income securities because most bonds pay a steady stream of interest income at periodic intervals throughout the life (also known as the term or tenure) of the bond. This interest is known as the coupon and the coupon rate is expressed as a percentage of the principal, known as the face or par value of the bond. Bond prices are usually expressed as a percentage of face value. Upon maturity, bonds are redeemed at face value and bondholders are paid 100% of face value. Some bonds do not offer coupons at all these are known as zero-coupon bonds and are priced at a discount to their face value. At maturity, you will receive the face value (which includes the accrued interest on the note). The yield on a bond depends primarily on the credit quality of the bond issuer. In any local market, the highest quality bonds are usually government bonds. They are usually followed by quasi-government or government linked entities, banks and then companies. Do note that when comparing bonds across different countries, an emerging market government bond may not necessarily be safer than a well-rated corporate bond. Some bonds, bond funds or bond ETFs may constitute Specified Investment Products (SIPs). For more information on the requirements in place when transacting SIPs, please refer to the consumer guide on SIPs. What are perpetual securities ? Perpetual securities are hybrid securities that combine the features of both debt and equity. You should note that even though perpetual securities have some bond-like features (such as coupon payments), they are not plain vanilla bonds. Firstly, perpetual securities do not have a maturity date. Secondly, the issuer may, but is not obliged, to redeem the perpetual securities. If the issuer does not exercise the redemption option, you can only exit your investment by selling the perpetual securities in the secondary market. You will therefore be exposed to market price fluctuations and liquidity risks.

In some issues, it is also possible for the issuer to have the right to defer the coupon payments. In the event of a winding up of the issuer, holders of perpetual securities normally rank ahead of ordinary shareholders but behind other senior creditors for the return of the issuers assets.

What is the return? Investors earn returns when they receive coupons and if the price of the bonds they own gain in value. Investors receive a regular coupon. If you buy a bond at 100% of the face amount and hold the bond until maturity, your return is equal to the coupon you receive. If you buy a bond at more or less than the face value, your return is based on the coupon you receive plus any capital gain or loss from holding the bond (i.e. the difference between the price you paid and the price you sold the bond.) A bonds return is usually called its yield. Why invest in bonds? Bonds may be attractive for investors who want a source of regular income or to diversify their portfolio of investment assets. A diversified portfolio helps to reduce the risks caused by a concentration of similar assets. By including assets whose values do not always move in the same direction or by the same degree as other assets in the portfolio, you may give up some gains but also reduce some losses in your portfolio. For example, certain market conditions which do not support the price of shares, may actually be positive for bonds.

What is the maximum amount you can lose? What is the worst that can happen when you invest in bonds?
Apart from market driven price fluctuations, an issuers bond price will suffer if investors feel that the issuers creditworthiness (its ability to repay its debt obligations) has deteriorated. For instance, if the issuer gets into serious financial difficulties, the likelihood of a default will increase. A missed coupon can also result in a credit event or default. If a default occurs, you may lose all or a substantial amount of the money you invest. The bondholder is a creditor. If the bond issuer becomes insolvent or bankrupt, creditors are generally repaid first, before shareholders. Bonds are therefore generally regarded as less risky than shares.

Are bonds suitable for everyone?

Not everyone should invest in bonds. Do not consider this type of investment if you: Do not understand or are unclear about the factors and scenarios that can affect returns; Do not understand the risks associated with bonds; Want potentially higher returns but are not prepared for risks which include the risk of losing a substantial part of your original investment amount; Cannot build a sufficiently diversified portfolio of assets; Are not prepared to leave your money tied up for long periods of time (a longer investment horizon is generally preferred to weather short term price fluctuations for potentially longer term gains); Do not have the time and resources to monitor the markets, corporate performance.

What you should watch out for - What makes bond prices move?
Bond prices Bond prices are usually quoted as a percentage of the par or face value of the bond, e.g. 101% or 96%. Comparison Status

Bond Price > Face Value Bond Price < Face Value Bond Price = Face Value

Premium Discount Par

Bond prices may be affected by many factors. Two important factors which cause bond prices to fluctuate are the credit quality of the bond issuer and prevailing interest rates. Bond issuers credit quality Bonds of issuers with higher credit quality generally trade at lower yields than bonds of issuers with lower credit quality. A higher yield compensates investors for the higher risks they are exposed to with poorer quality bonds. Investors are advised to find out more about the bond issuer and the business sector it operates in. Events or factors which may impact the issuers business operations, financial conditions and creditworthiness (ability to repay its debt or likeliness to default), will also impact the issuers share price or bond price. Bond issuers may be rated by credit rating agencies such as Fitch, Moody's or Standard and Poors. Credit ratings represent the opinion of the credit rating agencies as to the creditworthiness of the issuer. This is additional information which investors may wish to take into account in their assessment. Credit ratings are not a recommendation to invest in the bonds. They also have their limitations the ratings are based on information available at the time the rating is assigned so they are subject to revision or withdrawal. As issuers financial strength can change quickly, there is no assurance that any revisions to the ratings will be made in a timely manner. Investors should therefore carefully consider all relevant information before making their investment decisions, rather than rely solely or mechanistically on individual yardsticks such as credit ratings. Issuer credit ratings are usually divided into long-term and short-term categories based on the maturity and form of the debt instrument. Short-term ratings are assigned to instruments with maturities of 1 year or less. Ratings are also grouped into investment-grade debt and non-investment grade (speculative grade) debt. Within these groups are further ratings. Rating agencies also give Outlooks which assess the future direction of an issuer's credit rating over, say the next six months to two years). A Positive rating outlook indicates a potential rating upgrade while a Negative outlook shows a potential downgrading. A Stable outlook means there is likely to be no change. Issuers are placed on a rating watch when a credit rating agency is reviewing their current credit rating. Price risk and interest rate risk Generally, bond prices are inversely related to interest rate movements. A rise in interest rates could see a fall in bond prices. The price adjustment compensates the buyer for the coupon which is lower than comparable market rates. Similarly, if rates fall, the buyer pays a higher price for receiving a coupon that is higher than comparable market rates. Investors who choose to sell their bonds in a rising interest rate environment will suffer a capital loss if bond values are now below the price they paid. On the other hand, if investors continue holding the bond, they will incur opportunity cost as their funds could have been invested in higher yielding instruments. Market price fluctuations may not matter as much for investors who buy and hold as they will receive interest throughout the life of the bond and principal at maturity, provided there is no issuer default. Investors in bond funds, on the other hand, may be affected by interest rate movements as these will have impact on the funds net

asset value and so the price at which investors can redeem their units. Interest rates are in turn determined by macroeconomic factors, such as the state of the economy, inflation, unemployment, international trade and government fiscal and monetary policies. The longer the life of the bond the more sensitive will its price be to changes in interest rates.

What can cause me to lose money?

Factor / risk Default (or credit risk) Call risks What this means Bonds are forms of debt, so bond prices will be affected by the perceived credit quality or probability of default of the bond issuer. When an issuer defaults, you may lose all or a substantial part of your investment. Some bonds have a callable feature which gives the issuer an option to buy back (redeem) the bond before its maturity date. If a bond is called when prevailing interest rates are lower than at the time you bought it, you will be exposed to reinvestment risks. Bond prices are inversely affected by interest rate movements. A rise in interest rates could see a fall in bond prices. If interest rates fall, buyers pay a higher price to receive a coupon that is higher than the prevailing market rates. In an environment of declining interest rates, investors may have to reinvest the income received and any return of principal at lower prevailing rates. Investing in bonds denominated in foreign currencies exposes the investor to the risks of adverse currency movements if investors own currency base is different. Some bonds are less liquid than others. This may happen if the investors of a particular bond issue are largely buying to hold, so there are fewer buyers and sellers. This may make it harder to buy or sell the bonds. Even in cases where the bonds are listed or traded on an exchange, there is no certainty that a liquid secondary market will develop. This arises when the rate of inflation is higher than the bond's coupon rate. This will erode the value of your investment as the purchasing power of the bonds coupons and principal falls. This is usually described in the prospectus. It can cover events that can unexpectedly erode an issuers credit strength and ability to make good on its debt payments, for example, natural disasters, takeovers, and restructurings. A bonds price will fluctuate with changing market conditions, including the forces of supply and demand and interest rate changes.

Price risk and interest rate risk Reinvestment risk Exchange rate risk Liquidity risk

Inflation risk Event risk

Market risk

What are risks of foreign listed products? In addition to the above risks, foreign listed products expose you to additional potential risks due to legal and regulatory differences between the foreign regime and the local regime. For example, there may be differing disclosure standards and investor protection. Foreign exchange risk and tax liabilities may also be present. You should be aware that political, economic and social factors in the foreign country may influence the domestic market and impact the value of the investment. The extent of risks will also differ depending on the jurisdiction in which the foreign product is listed. Make sure you are familiar with the different risks and that you are prepared to undertake those risks before investing.

What are government bonds, corporate bonds, bond funds and bond ETFs?

There are different ways to invest in bonds. An investor may consider government bonds, corporate bonds, bond funds or bond ETFs. Government Bonds Government bonds are often regarded as a proxy for risk-free assets in the country of issue and a benchmark to price other assets issued in that country. Hence, the interest rates on government bonds tend to be lower than those of bonds of other issuers of the same maturity. When assessing the creditworthiness of a country, an investor must consider the financial health of the country, make an assessment as to its economic resilience, and the state of its public finances. In Singapore, investors can purchase Singapore Government Securities (SGS). SGS are available as Treasury bills (T-bills) and as bonds, and are backed by the Singapore Government. Treasury bills tend to have shorter maturities of 3 months or 12 months, whereas the bonds have maturities of 2, 5, 10, 15, 20 or 30 years. You can buy SGS at primary auctions (via local bank ATMs) or in the secondary market. The minimum investment amount is $1,000. Investors can choose to hold the SGS to maturity or sell them before maturity in the secondary market. You can trade SGS bonds via an SGS agent or dealer bank or on the Singapore Exchange (SGX). T-bills are not traded on SGX and secondary trades must be executed via an SGS dealer or agent bank.

For more information, visit the SGS website. Corporate Bonds These bonds carry higher interest rates than government bonds because they generally carry more risk than government bonds. You can purchase corporate bonds listed on SGX in the same way as you would buy equities, paying the normal brokerage fees. While corporate bonds may offer better returns than savings and fixed deposits, you should note that you will be exposed to credit and other risks. Not all bonds are available in small denominations or suitable for retail investors. Price Quotation of Corporate bonds and SGS bonds traded on SGX Corporate Bonds SGS

Prices quoted on dirty price basis Prices include any applicable accrued interest

Prices quoted on dirty price basis Prices quoted in S$ per $100 of principal amount and include any applicable accrued interest

The trading prices of corporate bonds and SGS quoted on SGX include accrued interest. When accrued interest is included in the price quoted, the price is referred to as a dirty price. Do note that other sources may quote prices which exclude accrued interest. These are referred to clean prices. Do make sure you clarify whether accrued interest is included or not before you transact. Bond Funds An investor can also gain exposure to bonds by purchasing units in bond funds. There are different types of bond funds, including global bond funds, regional bond funds, country-specific bond funds, sector or industry specific bond funds, and high yield bond funds. Each has its own investment objective. While many funds regularly pay income (the actual amount paid depends on factors such as market conditions as well as the coupons received from the bonds held), investors of bond funds are generally encouraged to examine total returns when evaluating a bond funds performance. Total returns include income generated by bonds held as well as gains or losses of those bonds over a period of time. Investing in bond funds is usually more efficient than investing directly in the same bonds comprising the funds. Firstly, you do not need as big a capital outlay as if you were to buy all the bonds in the fund. Secondly, the task of actively managing your bond holdings to control your portfolios risks and achieve desired returns is passed on to the fund managers. But such activities attract management fees and/or other professional charges, which will reduce the overall returns to you. Choose a fund that suits your needs and circumstances. You should understand the funds investment objectives as well as the factors that can impact the returns the fund offers. Bond ETFs Bond exchange-traded funds (ETFs) may track the performance of certain bonds or bond indices. They may invest in a portfolio of bonds or replicate that exposure through the use of derivative products like swaps. The Bond ETFs can have different strategies. Read here for more information on ETFs. Cooling off period If you have purchased an unlisted bond, you have the right to cancel the agreement within 7 calendar days from the date that the purchase agreement is signed. Your right to cancel the agreement should be set out in or together with the relevant application form for the purchase of the product. If you exercise this right, you should not incur any sales charge or equivalent charges with respect to the termination of the purchase agreement. However, the amount repayable to you may be adjusted to reflect changes in market value of the product. Concerns about issuer with bonds listed on SGX If you are a bondholder and have some concerns about the companys compliance with SGXs listing rules, or about possible price manipulation, you may wish to contact SGX. SGX is the frontline regulator of listed companies and is responsible for maintaining a fair, orderly and informed market. Duties of trustees SGX requires companies issuing retail-based debt securities to appoint a suitable trustee (a trust company) to

represent the holders of its debt securities listed on the Exchange. A trust deed (between the company and the trustee) contains provisions for the protection of the rights and interest of bondholders, such as a limitation on the amount that the company may borrow. The trustee acts for the benefit of bondholders on the terms and subject to the conditions contained in the trust deed. For instance, the trustee may take action on behalf of the bondholders by giving notice to the company that the bonds are immediately repayable following the occurrence of an event of default. Bondholders should read the key terms and conditions of the trust deed provided in the prospectus.

Key questions to ask before investing in bonds

You should consider the suitability of an investment in bonds in light of your own circumstances. In particular, you should consider whether you: have sufficient sufficient knowledge and experience to make a meaningful evaluation of the merits and risks of investing in the bonds; understand thoroughly the terms and conditions of the bonds; have access to, and knowledge of, appropriate analytical tools to evaluate the investment in the bonds and how such investment will impact your overall investment portfolio; have sufficient financial resources and liquidity to bear all the risks of investing in the bonds or holding the bonds to maturity; are able to monitor or evaluate (either by yourselves or with the help of a financial adviser) changes in economic or other factors that may affect the issuer or the bonds.

The above information is prepared in collaboration with the Association of Banks in Singapore, Investment Management Association of Singapore and Securities Investors Association (Singapore).

Unit Trusts
What is a unit trust or fund? What is the maximum amount you can lose? What do I watch out for? What can cause you to lose money or reduce the returns on your investments? What are the types of unit trusts or funds available? What is the Trust Deed and Role of Trustee? Evaluating fund performance What are the fees and charges? What is the Total Expense Ratio (TER)? How are funds priced? What happens if the fund is terminated? What documents would I receive? Key questions to ask or considerations before buying a unit trust or fund

What is a unit trust or fund?

If you invest in a unit trust or fund, your money is pooled with money from other investors and invested in a portfolio of assets according to the funds stated investment objective and investment approach. A unit trust is a fund which adopts a trust structure; not all funds use a trust structure. In this guide, the term fund will also refer to a unit trust. In Singapore, local and foreign funds offered to retail investors are regulated as collective investment schemes. The unit trust or fund is managed by a fund manager. Some investment products have been categorised as Specified Investment Products (SIPs). Do check with your financial institution whether the product you are considering is an SIP. For information on the requirements in place when transacting SIPs, please refer to the Consumer Guide on SIPs requirements. Foreign listed products risks Foreign listed products expose you to additional potential risks due to legal and regulatory differences between the foreign regime and the local regime. For example, there may be differing disclosure standards and investor protection. Foreign exchange risk and tax liabilities may also be present. You should be aware that political, economic and social factors in the foreign country may influence the domestic market and impact the value of the investment. The extent of risks will also differ depending on the jurisdiction in which the foreign product is listed. Make sure you are familiar with the different risks and that you are prepared to undertake those risks before investing. What is the return? What is the net asset value (NAV)?

You invest in a fund by buying units in the fund. There is capital gain when the price of the units rises above the price you paid for the fund. Some funds pay dividends. The price of each unit is based on the funds net asset value (NAV) divided by the number of units outstanding. The NAV of a fund is the market value of the fund's net assets (investments, cash and other assets minus expenses, payables and other liabilities). The NAV is usually computed daily to reflect changes in the prices of the investments held by the fund. Why invest in funds? Funds invest in a diversified range of assets. A funds diversified portfolio means risks can be better spread over the assets in the fund. The poor performance of any one asset in the fund is less likely to have a major adverse impact on your investment as a whole. Funds also provide access to assets or markets which may be difficult for you to invest in directly. Also, for a smaller amount of money, you can invest in a diversified portfolio of assets which could cost you more to buy if you had to pay for each asset in the fund individually. There are many funds to choose from. You can select a fund or a combination of funds to cater to your specific investment objectives and risk tolerance. For example, if you are nearing retirement and have a low tolerance for risk, you may consider funds whose objectives are capital preservation and income generation. On the other hand, if you are looking for capital appreciation and are willing to accept higher risks, there are also funds that focus more on growing your capital rather than generating income. You can invest in funds or unit trusts via the Supplementary Retirement Scheme (SRS) or the Central Provident Fund Investment Scheme (CPFIS). For more information on CPFIS, visit the CPF Board website. For more information on the SRS, you may wish to visit the websites of the Inland Revenue Authority of Singapore and the Ministry of Finance.

What is the maximum amount you can lose?

Funds are not principal or capital-guaranteed. You may lose a substantial amount of the money you invested in certain situations. The risks of investing in the fund are described in the product offering documents such as the prospectus and the product highlights sheet. You should also be aware that fees can reduce the returns from your unit trusts. Fees are usually payable, regardless of how well or poorly the fund performs. Even if your funds value has been fairly stable, the fees you pay will, over time, reduce the value of your investment. Are funds suitable for everyone? Investing in funds may not be for everyone. For example, they may not be suitable for you if you: Want potentially higher returns BUT are not prepared for variable returns which include the risk of losing a substantial part of the money you invested. Do not understand how returns are calculated or are unclear about the factors and scenarios that can affect returns; do not understand a funds investment objective, strategy or approach. Do not understand the risks associated with the fund. Some funds use financial derivatives to hedge risks and/or to improve performance. Investors should be aware of the risks associated with the use of financial derivatives, including the risk that the provider (or counterparty) of the financial derivatives defaults. Are not prepared to have your money tied up for long periods of time. As funds are exposed to market ups and downs, investors who stay invested long enough may be better able to ride out the downturns. For this reason, you should have adequate financial resources so that you wont have to liquidate your

funds during a market down turn if you need the money at short notice. If you need to convert your investments to cash in the short-term to meet specific needs, some funds may not be suitable for you. Are not familiar with the fund manager and funds track record.

What do I watch out for?

Unit trusts have certain features A fund is managed by a professional fund manager who decides what assets to buy or sell based on the investment objective of the fund. Do you know As an investor, you have no control over the investment decisions of the fund manager. What you should do Assess whether the fund manager has the resources, experience and skills to manage the fund. A funds good recent short-term performance may not mean that the performance will be maintained over a longer period. Even with a longer track record, past performance is not necessarily a good indicator of future performance. Find out about the type and amount of fees applicable.

Fees charged by professional fund managers will reduce your returns. Funds invest in a diversified range of assets to spread its risks. Investing in funds may diversify some risks, but cannot eliminate all risks. Be prepared for price fluctuations. You may face risks unique to that particular fund. For example, a fund investing in emerging markets may be subject to political and legal risks, as well as foreign-exchange risk. The variety of funds available can be overwhelming. If you invest indiscriminately, you could end up with an assortment of funds that does not match your financial needs.

After investing, you should regularly monitor the funds performance to see if it meets your expectations.

Funds may provide access to assets or markets which may be difficult or expensive for you to invest in directly.

You should regularly monitor its performance and the economic and political risks of the markets you are invested in.

There are many funds to choose from to cater to your risk tolerance and specific investment objectives (e.g. capital preservation, income generation or capital appreciation)

You should be clear about your investment objectives before deciding which funds are suitable for you.

What can cause you to lose money or reduce the returns on your investments?
Some of the risks associated with investing in unit trusts include: Factor / condition Market risk What happens The Funds NAV or trading prices will be affected changes in the value of the investments made by the fund. The funds investments may, in turn, be affected by various factors such as changing economic, political or market conditions in the market(s).

Liquidity risk

Funds also face liquidity risk. Some funds may be thinly traded. This may affect the prices at which you buy or sell. This may happen, for example, if there is little interest or research coverage for the fund or the underlying market or investment theme it is exposed to.

Interest rate risk Foreign currency or foreign exchange risk Counterparty risk

Funds that invest in bonds, debentures or other debt securities will be exposed to interest rate movements. Funds that invest in assets denominated in foreign currencies may be exposed to adverse currency movements.The funds currency base may also be different from your own.

Funds may be exposed to the risk that the counterparty that they trade with is unable to meet its payment obligations due to a deterioration of the counterpartys financial situation or otherwise.

You should also be aware that fees charged by the fund manager can reduce the returns from your unit trusts. In particular, management fees are payable regardless of how well or poorly the fund performs. Even if your funds value remains stable, the fees you pay will over time reduce the value of your investment.

What are the types of unit trusts or funds available?

What assets do funds invest in? There are different types of funds available. Each one will have its own investment objective and investment approach or strategy. The investment objective may be capital appreciation or to generate income. The fund manager decides the funds investment strategy (to achieve the investment objective) and what assets to buy or sell. In general, funds may be divided into three main categories: shares, bonds, and balanced funds that combine shares and bonds. Aside from shares and bonds, funds can invest in assets or a combination of assets such as:Financial derivatives Cash or cash-equivalent products Real estate Units in other funds Funds offered to retail investors are not permitted to invest in physical commodities directly. They may however obtain exposure to commodities by using financial derivatives. What investment objectives, strategies or approaches do funds have? Fund managers may set up funds that invest in a specific country or geographical region, e.g. Singapore, Asia, or Asian emerging markets. They may also set up funds to invest in specific sectors, e.g. infrastructure, technology and healthcare. There are also funds which invest according to specific themes such as climate change or ethical investing. The risks associated with a fund strategy are determined by a combination of the underlying assets selected, and the geographical regions, industrial sectors or themes. Funds with the same investment objective may use different investment strategies to achieve the same goal. You should understand and ensure that the fund managers investment style is in line with your own investment objectives.

It is important to choose a fund that meets your own investment objective and risk profile. The diagram below shows the potential risk and return profile of different types of funds:

Note that the chart above is for general guidance only. Bond funds which focus on emerging market government bonds or high yield corporate bonds may not necessarily be safer than funds that invest in blue chip equities. This is because high yield corporate bonds may expose the fund to significant credit risks. What are actively- and passively- managed funds? Funds may also be classified as either passively-managed funds or actively-managed funds. Passively-managed funds usually invest in the component stocks of a benchmark index and do not require the fund manager to spend much time selecting the stocks. An actively-managed fund aims to outperform a particular benchmark index. Actively-managed funds may attract more fees and charges as the fund manager makes more active investment decisions.

What is the Trust Deed and Role of Trustee?

Local funds are generally structured as unit trusts and constituted by a trust deed. The trust deed is a legal document that sets out the terms and conditions governing the relationship between investors, the fund manager and the trustee. It describes the investment objectives of the fund, and the obligations and responsibilities of the fund manager and trustee. The trustee is independent of the fund manager and acts as the custodian of the funds assets. The trustee ensures that the fund is managed according to the trust deed to minimise the risk of mismanagement by the fund manager.

Evaluating fund performance

There are three main ways of evaluating the performance of your fund: Total Returns These take into account both the income received and price changes.

Information on total returns is available from the fund manager or from the IMAS / LIA FundSingapore.com website. Returns are annualised so you can examine performance from year to year, or over a number of years, and compare performance of one fund with another. Check if returns are provided net of fees and charges. Compare funds performance against its benchmark index Funds performance can also be measured against a benchmark index. For example, funds investing in Singapore stocks often benchmark against the Straits Times Index. A fund is said to have outperformed its benchmark index if the return is higher than benchmark. Conversely, if the return is lower than the benchmark index, the fund has underperformed. An actively-managed fund is generally expected, over a reasonable time horizon, to outperform its benchmark index. For passive or index funds, you can compare the funds performance against its benchmark index to see how closely the fund replicates the indexs returns. Performance relative to risk taken The Sharpe ratio measures a funds historical risk-adjusted performance. Generally, the higher the Sharpe ratio, the higher the excess return the manager was able to generate per unit of risk taken. In other words, when comparing two funds that are benchmarked against an index, the fund with the higher Sharpe ratio gives more returns for the same level of risk.

What are the fees and charges? What is the Total Expense Ratio (TER)?
There are two broad categories of fees: Fees and charges payable by you these represent sales or redemption charges that you pay to subscribe or redeem in a fund. Subscription fee or initial sales charge (also known as front-end load) Payable when you buy a fund. Ranges from 1.5% - 5% of your investment Funds with an initial sales charge do not usually charge a redemption fee Redemption fee or realisation charge (also known as the back-end load) Payable whenever you sell or redeem the fund. Ranges from 1% - 5% of your investment Some funds progressively reduce the redemption fee if you hold your investment over a longer period of time Funds that charge a redemption fee do not usually have an initial sales charge Switching fee

Payable when you switch from one fund to another fund managed by the same fund manager. Typically, about 1% of your investment.

Fees and charges payable by the fund these are recurring fees that the fund manager, trustee and other parties charge the fund for providing their services and ultimately reduce your return on investment. Management fee An annual fee charged by the fund manager for Trustee fee An annual fee charged by the trustee for providing custodian services for Miscellaneous fees Other fees include fund administration fees and

managing the fund Usually 0.5% - 2% per annum of the funds NAV

safekeeping the funds assets Usually 0.1-0.15% per annum of the funds NAV

audit fees.

The recurrent fees make up the Total Expense Ratio (TER). The TER is usually between 1.0% and 2.5% of the funds NAV. As a rule of thumb, for your fund to grow in value, the returns must be greater than the costs of running the fund. Assess a funds TER before deciding whether to invest in it. Use the TER to compare the costs incurred by different funds with the same investment objectives or approach. Find out the maximum amount that the fund can levy for each charge. Ask for a clear breakdown of all the fees and charges that you expect to pay for your investment. Do note that charges which are not currently levied may still be imposed in the future.

How are funds priced?

Funds are priced either by the bid and offer pricing method or the single pricing method. You can find details of the pricing method in the prospectus and the product highlights sheet (PHS). You can get updated valuations of your fund from the daily newspapers and the FundSingapore.com website. Most funds in Singapore allow daily buying and selling of units. Bid and offer pricing Bid Offer Spread Price at which investors sell their units Price at which investors buy units Difference (spread) between bid and offer prices of funds units reflects subscription (sales) and redemption charges (if any)

In the bid and offer pricing method, the subscription charge is added to the NAV per unit, while the redemption charge is deducted from the NAV per unit. Single Pricing The fund provides a single quote that reflects the NAV per unit. The subscription charges are deducted from the amount invested before the units are allocated. Any redemption charge will be deducted from the redemption proceeds. In the following example, the fund is assumed to have a single pricing structure, and levy both subscription and redemption charges. Bid and offer pricing Scenario Assumed numbers Subscription charge is added to NAV per unit Redemption charge is deducted from NAV per unit. Buying with $1,000 investment (i) Initial 5% subscription charge (ii) NAV of Offer price per unit = NAV of $1.00 + initial sales charge of 5% Single pricing Subscription charges are deducted from amount invested before units are allocated Redemption charge is deducted from redemption proceeds. Buy price per unit = NAV of $1.00 per unit = $1.00

$1.00 per unit

= $1.05 Number of units bought = $1,000 $1.05 = 952.38 Number of units bought = $950 (5% sales charge deducted from $1,000) buy price = 950 With $1,000, you buy: 950 units valued at $950

With $1,000, you buy: 952.38 units valued at $952.38 Selling when NAV has increased to $1.10 (i) 1% redemption charge at sale (ii) NAV has increased to $1.10 per unit

Bid price per unit = NAV of $1.10 - redemption charge of 1% = $1.089 Sale proceeds = $1.089 952.38 units = $1,037.14 If you sell your investment of 952.38 units, you receive $1,037.14 (this is less than the NAV of $1,047.62 ($1.10 X 952.38 units)

Sell price per unit = NAV of $1.10 = $1.10

Sale proceeds = $1.10 950 units 99% (Less redemption charge of 1%) = $1,034.55 If you sell your investment of 950 units, you receive $1,034.55 (this is less than the NAV of $1,045 ($1.10 X 950 units)

What happens if the fund is terminated?

A fund is terminated when the fund manager decides to wind up the fund. This may occur if the fund manager ceases operations or when the fund size has become so small that the manager decides it is not economically viable to continue managing it. Before terminating a fund, the fund manager should tell you how to redeem your investment or make arrangements for you to transfer your investment to another fund. The fund manager should notify you of the termination no later than one month before the fund is to be terminated. Find out more from the funds prospectus or trust deed.

What documents would I receive?

Every fund must be accompanied by a prospectus and product highlights sheet (PHS) when it is offered to you. Ask for these documents and read them carefully to understand the funds investment objective, strategy, risks, fees, historical performance and other important information. Ask the fund manager or your financial adviser if you have questions. Find out more about what is in the prospectus and PHS. After investing, you can expect to receive the following reports:

Within three months of the funds financial year-end

Annual reports Annual accounts Auditors report

Within two months of the funds financial half-year end

Semi-annual accounts Semi-annual reports

Some fund managers also publish monthly or quarterly updates, or factsheets on their funds. Read these materials to monitor how your fund is performing. There are other ways to find out how your fund is performing. These include: The financial section of local newspapers Websites of financial advisers and fund managers The Fund Information Service at FundSingapore.com this provides information about funds and investment-linked life insurance policies available in Singapore What to look out for in a prospectus and PHS? Here are some of the key items to read: Key Item Investment objective, focus and approach Risks What you should know / how to use this Do these match your own investment goals?

Do you understand the risks of investing in the fund and can you afford to take them, e.g. how would you cope with losing money? Funds may comprise shares and / or bonds, and perhaps some financial derivatives.

Performance

While a funds past performance is not indicative of its future performance, it is still useful to compare the funds performance to its benchmark and other funds with similar investment objectives. Information about the performance of various funds and investment linked products can be found at FundSingapore.com. Check what you need to pay and compare them with similar funds. Procedures for these transactions are described in prospectus. Read these carefully.

Fees and charges Subscription, redemption and switching of units

What to look out for in a fund report? When reading a fund report, do watch out for the following terms: Item Return Explanation Shows funds return in previous periods. Note that past returns do not guarantee future

performance. Your returns would depend on the funds actual performance. Sharpe ratio Inception date Latest fund size Price information (1-year high / 1year low) Volatility This is an indicator of the risk-adjusted performance of a fund. The higher the ratio, the better the funds returns relative to the amount of risk taken. Tells you when the fund was launched. Funds with larger asset base are likely to have a lower TER or costs per unit invested. Shows the highest and lowest unit prices in the past one year. Provides an overview of price fluctuations of the fund but should not be used alone to assess how risky a fund is. Measure of fluctuation of a funds value over a time period. Higher volatility implies higher risk. Make sure you select a fund based on the amount of risk you are willing to bear and can afford to take.

In addition, while the funds investment objective may not change, the actual investment approach or strategy deployed may change. Changes in the top ten holdings of the fund (as shown in the funds periodic reports) could indicate that the investment approach or strategy has changed. If you notice that the funds holdings do not correspond with its stated investment objective, find out why. Watch out for how the fund performs compared to its benchmarks. Make sure you understand the charts provided, as well as their limitations. For example, if performance appears to be exceptional over certain periods but not other periods, find out why. How do you invest in funds? The list of funds authorised by MAS for sale to retail investors is available on the website via OPERA, the electronic repository for public offers of investments. It also includes foreign funds or unit trusts recognised by MAS for offer to retail investors. These are categorised as recognised funds. You can change your mind about your fund purchase within seven calendar days. There will not be any administrative penalty for cancelling your purchase but you may suffer a loss if the fund has fallen in market value after you bought it. If the market value of the fund has risen, you will get a full refund of what you paid for the fund, but you will not be entitled to the gain. In either case, the sales charge will be refunded to you. Note that the right to cancel is not available if you are making additional investments in a fund that you already own. It also does not apply to investors who purchase recognised funds or funds that are listed on the Singapore Exchange. What is the sales process? When recommending a fund, your financial adviser is required to disclose to you the key features of the product including the following: Nature and aim of the product Benefits of the product Risks of the product Details about the fund manager Fees and charges to be borne by you Share of fees and commissions due to the financial adviser Warnings, exclusions and disclaimers

Key questions to ask or considerations before buying a unit trust or fund

Funds differ in terms of investment objectives, strategies, risks and costs. Think about whether you want the fund to provide regular income or for your initial capital to grow. Choose one that matches your investment objectives and risk profile. When choosing a fund, consider the following: 1. Your needs and goals/objectives, personal circumstances and risk profile 2. Find out more about the unit trust you are considering: ensure that the funds investment strategies are in line with your own investment objectives ensure you understand all the risks and are comfortable it matches your own risk profile you should be comfortable that the fund manager has the necessary resources, experience and skills to manage your investment. Check that both the firm and the individuals managing the fund have a credible performance track record in managing the fund which you intend to invest in. However, do note that past performance is not necessarily an indication of future performance. 3. Find out about alternative investment products and compare their risk-return profile and features with the product introduced to you.

The above information is prepared in collaboration with the Association of Banks in Singapore, Investment Management Association of Singapore and Securities Investors Association (Singapore).

Shares
What are shares? What is the maximum amount you can lose? What is the worst that can happen when you invest in shares? Are shares suitable for everyone? Key questions to ask or considerations before investing in shares

What are shares?

Shares are issued by companies to raise capital or financing from investors. When you buy a companys shares, you become a shareholder of the company. Shareholders are usually entitled to a share of any dividends that are declared and paid. If the company you have invested in is wound up or liquidated, you are entitled to any assets that remain only after the companys creditors have been paid. There are broadly two classes of shares ordinary or common shares and preference or preferred shares. In this guide, we use shares to refer to ordinary shares. Ordinary shareholders have a right to attend and vote at general meetings on matters such as a major acquisition/disposal or the appointment of directors. A general meeting provides a forum for you to engage the companys board/senior management and voice your views on matters affecting the company. Shares are mostly traded in board lots of 1,000. If a share is priced at $1, you would pay $1,000 to invest in one lot of shares (excluding transaction costs). Some investment products have been categorised as Specified Investment Products (SIPs). Currently, all investment products listed on a foreign exchange are categorised as SIPs. With effect from October 2012, some of these products will not be considered as SIPs provided they meet certain requirements. For information on the requirements in place when transacting SIPs, read our consumer guide. Foreign listed products risks Foreign listed products expose you to additional potential risks due to legal and regulatory differences between the foreign regime and the local regime. For example, there may be differing disclosure standards and investor protection. Foreign exchange risk and tax liabilities may also be present. You should be aware that political, economic and social factors in the foreign country may influence the domestic market and impact the value of the investment. The extent of risks will also differ depending on the jurisdiction in which the foreign product is listed. Make sure you are familiar with the different risks and that you are prepared to undertake those risks before investing.

What is the return? Shareholders earn returns when they receive dividends and if they decide to sell their shares when the price of the shares gain in value. Dividends are paid out of the companys profits. Not all the profits may be distributed. Companies may choose to re-invest profits generated from their operations into their business. A companys share price reflects, amongst others, its growth prospects and future earning potential. Why invest in shares? Investors buy shares in the expectation that the share price will rise. Some may also buy shares as a hedge against inflation or for dividend income.

What is the maximum amount you can lose? What is the worst that can happen when you invest in shares?
Apart from market driven price fluctuations, a companys share price will be under pressure if the company performs badly and / or gets into serious financial difficulties. Shareholders bear more risk than bondholders and other creditors if the company fails and is wound up. When this happens, they rank behind all creditors before they are able to receive any assets that have not already been exhausted to pay creditors. In the worst case scenario, a shareholder may lose up to the amount invested in the company. Other risks include companies requesting for a trading halt or trading suspension for the purpose of disseminating material information to the investing public. SGX may also suspend trading of a companys shares in certain circumstances. As an investor, you should not overlook rights issues and other corporate actions. Also, some investors use margin financing when trading shares. Leverage trading can be risky and can lead to unlimited losses depending on the positions you take.

Are shares suitable for everyone?

Share investing may not be suitable for everyone. For example, shares may not be suitable for you if you: Are not familiar with or are unclear about the factors and scenarios that can affect share prices; Do not understand the risks associated with shares; Want potentially higher returns but are not prepared for risks which include the risk of losing a substantial part or all of your investment; Cannot build a sufficiently diversified portfolio of assets (avoid being overly concentrated in a few types of shares or asset classes) Are not prepared to leave your money tied up for long periods of time (a longer investment horizon is generally preferred to weather short term price fluctuations for potentially longer term gains); Do not have the time and resources to monitor the markets, corporate performance as well as react to corporate actions such as rights issues. What makes share prices move? Share prices are driven by economic and market conditions, as well as industry and company specific conditions. Much of the price movement of a share may be explained by how the overall market is performing. But not all shares react in the same way to the same set of economic, market or business conditions. What are blue chips, large caps, growth or cyclical shares?

Shares are often sorted into categories based on the characteristics they have, for example some shares may be referred to blue chips, or be perceived to have growth or cyclical tendencies. Such categorisation is based on market convention and may change over time. A companys market capitalisation is the total market value of its shares. Shares may also be sorted by market capitalisation, for example, small caps, mid-caps and large caps. What constitutes a small, mid or large cap depends on the particular market you are interested in. Stocks with smaller market capitalisation may be newer companies, and not very well-researched. How do you select shares for investing? Be clear about your investment objectives first, that is whether you are building up capital or looking for income, and how much risk you are prepared to take. This will help you narrow down your search. Investors may use fundamental analysis or technical analysis or a mixture of both when deciding which shares to invest in. Before investing, make sure you are familiar with the company including its business operations, whether it has a steady growth outlook, the industry it is in, its financial performance, corporate governance, whether there are any weaknesses and other factors which could affect its performance and share price. Beware of investing in shares or any other investment product based on hot tips or rumours. Where can you get information to monitor your shares? You can get live trading prices from the SGX website. There are on-going disclosure requirements if the shares are listed on SGX. Under SGX Listing Rules, companies are required to announce all material information via SGXNET. Companies are also required to announce their full year and interim financial results. Your broker may also provide research and analysis on the shares you are interested in. Do keep track of the companys performance, its business and the performance of the industry it operates in by reading announcements, annual reports, and shareholders circulars or other documents issued by the company. Dividends, share placements, rights and bonus issues and other important things you should know Companies may carry out various corporate actions such as bonus or rights issues and share buybacks. As a shareholder, you should find out how these corporate actions will affect you. What is an IPO? Companies seeking to list on SGX normally make an initial public offering (IPO) of its shares. In connection with the offering, the company has to prepare a prospectus that is registered by MAS. Read the prospectus carefully to obtain an understanding of the company including its business operations, vulnerabilities, financial performance, corporate governance and other important aspects. You can access the prospectus through SGX and MAS OPERA websites. How do you get started?

Before you can start trading, you will need two accounts: a securities account with the Central Depository (Pte) Ltd (CDP) and a trading account with a stockbroking member of SGX-ST. The securities account is required for the settlement of trades. It maintains all the shares youll buy on SGX, and electronically records the movements of the shares in and out of your account as you buy and sell them. The trading account allows you to trade shares in the stock market. Both these accounts have to be linked before you can start trading. What are the fees and charges involved? You would need to pay brokerage commission to your broker. The commission is usually based on a percentage of the investment amount. In addition to brokerage commissions and other charges imposed by brokers, there is a CDP clearing fee and SGX trading access fee. Please note that GST is payable on all fees. Concerns about company If you are a shareholder and have some concerns about the companys compliance with SGXs listing rules, or about possible market misconduct, you may wish to contact SGX. SGX is the frontline regulator of listed companies and is required to administer a sound regulatory framework to maintain a fair, orderly and informed market. Alternatively, you may wish to make your views known at the companys Annual General Meeting.

Key questions to ask or considerations before investing in shares

Consider the suitability of an investment in shares in light of your own circumstances. In particular, you should consider whether you: have sufficient knowledge and experience to make a meaningful evaluation of the merits and risks of investing in shares; have access to, and knowledge of, appropriate analytical tools to evaluate the investment in the shares and how such investment will impact your overall investment portfolio; have sufficient financial resources and liquidity to bear all the risks of investing in shares, including the risk of losing all or a substantial part of your investment; are able to monitor or evaluate (either by yourselves or with the help of a financial adviser) changes in markets, economic or other conditions that may affect the issuer or trading in the shares.

The above information is prepared in collaboration with the Association of Banks in Singapore, Investment Management Association of Singapore and Securities Investors Association (Singapore).

Traded Life Policies

Q1: What are Traded Life Policies and Traded Endowment Policies?
Traded Life Policy A traded life policy (TLP) is a life policy that has been sold by the original policy owner to an investor other than the insurer itself. TLPs are also commonly known as second-hand life policies. TLPs are often the life policies of people who have experienced a decline in life expectancy and would prefer to realise the value in their life policies before the policies mature. These life policies could either be viaticals or life settlements. Viaticals are life policies belonging to the terminally ill patients with shorter life expectancies, while life settlements belong to people, typically over the age of 65, who have experienced a decline in health and hence life expectancy. Traded Endowment Policy A traded endowment policy (TEP) is commonly known as a second-hand endowment policy . It is an endowment policy that has been sold by the original policy owner to an investor other than the insurer itself. TEPs are often participating endowment policies. How is a TLP or a TEP Brought to Market? When a policy holder decides to liquidate his life or endowment policy, he may do so via an individual or company who wants to buy the policy for re-sale. Such an intermediary usually offers to buy a life or endowment policy at a price higher than the policies surrender value as offered by the insurer. The intermediary may re-sell the policy to a further investor. The intermediary may also choose to package the policy together with other life or endowment policies to form the underlying investment of a Collective Investment Scheme (CIS), a fund, or a corporate entity. Throughout the buying process, only existing policies purchased from the original policy holders are used. No new life or endowment policy is created in this process. What Happens in a Sale In the sale, both the ownership and benefits of the policy are transferred from the original policy owner to the investor. The obligation of paying the policy premium is transferred either to the investor or an intermediary who has purchased and is holding on to the policies with the intention of re-selling them to a further investor. However, the original life insured remains unchanged. Where policies have been packaged together with other life or endowment policies to form the underlying investment of a CIS, a fund, or a corporate entity, an investor that buys into such a CIS, fund, or corporate entity would indirectly be buying into the underlying TLPs or TEPs. Key learning: Remember that if you buy a TLP or TEP, you are obliged to pay the policy premiums until the policy matures or the person whose life is insured dies. The maturity date of your investment may be uncertain.

Obligations when purchasing TLPs and TEPs A TLP or TEP investor must pay the policy premiums just as if he were the original policy owner. In turn, the insurance company must pay out the benefits based on the terms in the policy contract to the investor when the policy matures or the original life insured passes on. The obligations of the intermediary to an investor are set out in the contract signed when the TLP or TEP is purchased. Investors should read all the terms and conditions of any contractual document, and make sure they understand the legal implications of entering into any agreement. Investors should not buy the TLP or TEP if they are uncertain about the terms or implications of the contract. Key learning point: Make sure you read and understand all the terms and conditions before you sign anything. Ask questions if there is anything that you do not understand. Intermediaries There are two types of intermediaries involved in the trading of policies, namely: i. the company or individual, known as the distributor, which facilitates the sale of the TLP or TEP to investors; and ii. the company or individual, which buys policies from policy holders and re-sells or packages the policies as TLPs or TEPs to provide to the distributor. In certain cases, the individual or company that provides the TLP or TEP to the distributor and the distributor itself may be the same entity. Intermediaries that buy policies from policy holders and re-sell or package the policies as TEPs or TLPs are not regulated by MAS, whether they are based overseas or in Singapore. Distributors of TEPs and TLPs are also not regulated by MAS, regardless of whether they are based overseas or in Singapore. Currently, registered life insurers in Singapore do not buy policies from policy holders for re-sale, and also do not distribute TLPs and TEPs. The TLPs and TEPs being sold in Singapore are generally policies bought from other countries.

Q2: Are TLPs and TEPs regulated by MAS? Is the buying of policies and the resale or packaging of such policies into TLPs and TEPs regulated by MAS?
No. There are no MAS administered regulations which govern the sale, purchase and distribution of TLPs and TEPs. This means that any individual or company involved in buying or distributing these policies is not regulated or licensed by MAS. The only exception to this is if a CIS, a fund or a corporate entity is already regulated under the Securities and Futures Act (SFA), and TLPs and TEPs form the underlying assets of the CIS, fund or corporate entity. In such cases, the CIS, the fund or the corporate entity would be regulated by MAS under the SFA. Implications Investors who buy TLPs and TEPs cannot rely on laws administered by MAS to take action against either the intermediary who re-sold or packaged the policies or the distributor of the policies should they encounter any problems with the investment process.

MAS strongly encourages investors who purchase investment products to deal only with individuals and companies that are regulated by MAS. For more information, investors may refer to the MAS' consumer guide on "Pitfalls of Dealing with Unregulated Persons". However, investors can seek recourse under the Consumer Protection (Fair Trading) Act (CPFTA). The CPFTA allows consumers aggrieved by unfair practices to have recourse to civil remedies before the courts. For more information on the CPFTA, please refer to the Ministry of Trade and Industry (MTI) website. Key learning point: Remember that if you buy a TLP or TEP, neither the intermediary nor the distributor is regulated by MAS.

Q3: What are the risks associated with investing in TLPs and TEPs?
Some of the risks associated with investing in TLPs and TEPs are: Life Extension Risk: It is difficult to accurately predict life expectancies. An inherent risk particularly associated with investing in TLPs and TEPs is life extension risk. This is the risk of the insured person outliving the indicated life expectancy. When this happens, investors will have to pay the premiums for longer than expected to finance the policy. As a result, the returns to the investor are reduced or may even be negative. Legal Risks: The TLP and TEP products that are currently distributed to local investors are generally policies acquired overseas. This makes it difficult for local investors to assess the quality of TLP and TEP products sold. Should any grievance or conflict arise, investors would need to enforce their contracts against life insurance companies located overseas and deal with the legal system of that overseas jurisdiction. Investors may therefore face significant difficulties enforcing their rights. This is because the legal system of the overseas jurisdiction may differ from that of Singapores. Liquidity Risk: As life expectancies are difficult to predict, investors may need to commit their investment funds for considerable periods of time, in some cases, 10 years or more. Investors may find it difficult to re-sell the policies they have purchased. Credit Risk: If the life insurance company becomes insolvent, investors are exposed to the credit risk of the life insurance company which issued the underlying life or endowment policy. Foreign Exchange Risk: The benefits from the policy may be paid in a foreign currency. Investors may have to bear the exchange rate risks of converting these benefits into the local currency. Other Risks: A higher incidence of fraud has been associated with the sale of TLPs and TEPs in countries where these products have been sold for some time. Investors risk losing their principal investment amount if life insurance companies deem a policy null or void due to fraud or other reasons. Social and ethical concerns have also been raised as the investment returns on such products are inversely linked to the life expectancies of the insured persons.

Conclusion
Transacting in TLPs and TEPs involves complex legal, confidentiality, disclosure and risk assessment issues. It is important that investors are well informed and fully understand the nature of the risks involved before entering into contracts involving these products. Here are a few things you should check before deciding to invest in a TLP or TEP. 1. Understand how these products work. Assess whether such products suit your risk appetite and investment time horizon. 2. Ask for written materials on the product and read the documents and fine print carefully. 3. Assess how investing in the TLP or TEP you are considering compares with other investment options. 4. Last but not least, if you find that you do not understand the TLP or TEP or are not comfortable with its risks, do not invest in it. Investors can refer to the following MoneySENSE guides for more information:

Key Questions You Should Ask Yourself before Buying an Investment Product Key Questions You Should Ask The Person Recommending An Investment Product To You

The above information is prepared in collaboration with the Association of Banks in Singapore, Investment Management Association of Singapore and Securities Investors Association (Singapore).

Exchange Traded Funds

What is an Exchange Traded Fund? Are ETFs suitable for everyone? What to watch out for what can cause me to lose money? Key questions to ask or considerations before buying an ETF

What is an Exchange Traded Fund?

Exchange traded funds (ETFs) are open-ended investment funds listed and traded on a stock exchange. Your money is pooled with money from other investors and invested according to the ETFs stated investment objective. An ETFs objective is to produce a return that tracks or replicates a specific index such as a stock or commodity index. ETFs are passively managed by ETF managers and do not try to outperform the underlying index. Hence, ETFs have fees and charges that are usually lower than those of actively managed investment funds. ETFs may have complex structures. They may be structured as cash-based ETFs or as synthetic ETFs, which involve the use of derivatives. Some investment products have been categorised as Specified Investment Products (SIPs). Do check with your financial institution whether the product you are considering is an SIP. For information on the requirements in place when transacting SIPs, please refer to the consumer guide. What is an index? A stock market index is a representative sample of the stock market and is expressed as a single value to measure the relative value of the stock market. What is the return? You invest in an ETF by buying units in the ETF. There is capital gain when the price of the units rises above the price paid for them. Some ETFs also pay dividends. Why do people invest in ETFs? There are many ETFs to choose from. If you buy an ETF which tracks a share index, you gain exposure to the performance of the index. For example, investing in an ETF that tracks the Straits Times Index (STI) provides investors with exposure to the Singapore market. You can gain this exposure without having to spend more money buying the component stocks of the index. In addition, fees and charges for ETFs tend to be lower than for actively managed investment funds as ETFs have lower management fees. There is also usually no sales charge, although any transactions in ETFs on the SGX

would still be subject to brokerage commissions or transfer taxes associated with the trading and settlement through the SGX. As ETFs are traded on a stock exchange, you can buy and sell units of ETFs throughout the trading day.

Are ETFs suitable for everyone?

Investing in ETFs may not be for everyone. They may not be suitable for you if you: Want potentially higher returns BUT are not prepared for variable returns which include the risk of losing all or a substantial part of your original investment amount; Do not understand how returns are determined or if you are unclear about the factors and scenarios that can affect returns; Do not understand the risks associated with the ETF. Investors should be aware of the risks associated with the use of derivatives by ETFs, including the risk that the provider or counterparty of the derivative defaults. Are not prepared to leave your money invested for long periods of time. A longer time horizon is generally preferred to ride out short term price fluctuations. But depending on the investors investment objective, some ETFs may be suitable for short term trading. Are not familiar with the ETF manager and the ETFs track record. What is the maximum amount you can lose? ETFs are not principal-guaranteed. You may lose all or a substantial amount of the money you invested in certain situations. The risks of investing in ETFs are described in the prospectus and product highlights sheet.

What to watch out for what can cause me to lose money?

Some of the risks associated with investing in ETFs whether cash or synthetic include: Risk Market risk Tracking error What it means You are exposed to market risk or the volatility of the specific benchmark tracked. For example, the price performance of an ETF tracking the STI will be directly affected by the price fluctuations of the component stocks of the STI. Changes in an ETFs net asset value (NAV) may not exactly correspond to price changes of the index. In cash-based ETFs, the manager may not be able to buy or sell the component stocks in their exact proportion, or adjust its underlying component stocks to keep up with market or weighting changes. Execution costs, investment constraints, or timing differences may also add to tracking error. You are exposed to foreign exchange risk when you buy an ETF which has a functional different from your own. Some ETFs may trade in a currency that is different from that of the underlying assets. Liquidity risk Designated market makers provide liquidity in ETFs by providing continuous bid-ask prices throughout the trading day. But if the market maker fails to perform its duty due to insolvency, or extreme market conditions, liquidity of the ETF units in the secondary market may disappear, making it difficult for investors to sell their ETF units. An ETFs traded price may not reflect NAV as the traded price is subject to market demand and supply conditions.

Foreign exchange risk

ETFs traded price not reflective of NAV

per unit

NAV is the net asset value of the fund, calculated at the end of each day while the indicative NAV is calculated periodically through the trading day. The indicative NAV will rise or fall correspondingly when the index value, which is based on the value of the index components, rises or falls.

Assets used in cash-based structures may be used for securities lending purposes. Investors are exposed to the risk that the borrower of the securities defaults and does not return the securities. What types of ETFs are available? ETFs aim to produce returns that track or replicate the performance an index. Here are some examples of types of ETFs available on the Singapore Exchange (SGX): Equities/stocks These aim to track the performance of a stock index, such as the Straits Times Index (STI). If the stock index increases in value by 2%, the ETFs value should also increase by approximately 2%, less any fees. ETFs can also track a specific bond index. Bond ETFs provide investors with exposure to bond indices. Commodity ETFs track the movement of commodity indices. These ETFs may provide investors of the ETFs exposure to commodity indices.

Bonds Commodities

Inverse (or short) ETFs track the inverse performance of indices. The short index moves inversely to its corresponding long index on a daily basis. If the long index drops by 2% in a day, the short index should increase by 2%. The inverse ETF tracking the short index should also increase by approximately 2% for the day, less any fees. Investors should note that the inverse index is designed to track the inverse position of the long index on a daily basis and may not be suitable for long-term investment. If you invest in an ETF tracking an inverse index for more than a day, the returns you get may be completely uncorrelated to the inverse performance of the relevant long index. How are ETFs structured and what do they invest in? There are different ways to structure an ETF even if its investment objective is to track the same underlying index. Cash-based ETF Cash-based ETFs are ETFs that invest directly into the assets that make up the index. They may: Invest in all of the indexs component stocks, bonds or assets. Invest in a representative selection of the indexs component stocks, bonds or assets. Synthetic ETF Synthetic ETFs are ETFs that use derivative products such as swaps or access products (for example, participatory notes) to produce returns which track the relevant indices. The use of derivatives means: More parties are involved, e.g. the swap counterparty or the access product issuer.

You are exposed to the risk that the swap counterparty or access product issuer defaults on its payment obligations under the swap or access product. Such a party may default if it becomes bankrupt or insolvent. The amount of loss an investor suffers will depend on the ETFs exposure to the counterparty or issuer. Synthetic ETFs that are swap-based may use either the unfunded or funded structure. Swap-based (unfunded structure) In an unfunded structure, the ETF buys and holds a basket of securities. The basket of securities may be completely unrelated to the index the ETF is tracking. The ETF then enters into a swap agreement with another entity known as the swap counterparty. The ETF will pay out the return it earns from the basket of securities to the swap counterparty. In exchange, the swap counterparty pays the indexs return to the ETF. The ETF holds and retains control of the basket of securities even if the counterparty defaults. In addition, the ETFs exposure to its swap counterparty is usually limited to 10% of the ETFs net asset value. This means the ETF could lose up to 10% of its net asset value due to unpaid obligations from the swap counterparty. Additional losses may still be possible, for example, if the basket of securities is liquidated under adverse market conditions.

Swap-based (Funded structure) In a funded structure, the ETF passes its cash holdings (pooled investors monies) to a swap counterparty. In exchange, the swap counterparty pays the returns of the index the ETF is tracking. The swap counterparty will post collateral with a third party custodian. The collateral is held to offset the ETFs exposure to the counterparty. The securities making up the collateral may be unrelated to the index the ETF is tracking. Generally, collateral posted by the swap counterparty should reduce the funded ETFs net exposure to the counterparty to not more than 10% of the ETFs net asset value. In the event that the counterparty defaults on its obligations under the swap, the funded ETF will suffer a direct loss of the difference between the index value and the value of the collateral. The funded ETF could suffer additional losses if the collateral is liquidated under adverse market conditions.

Access product-based In an access product-based ETF, the ETF invests in participatory notes (P-notes) or other derivative products that replicate the performance of the index. This structure has been used for indices on restricted markets such as China or India. For example, participatory notes linked to a basket of Chinese A-shares may be purchased and held by the ETF. As such, the ETF would be exposed to the counterparty risk of the participatory notes issuer. Risks specific to swap-based structures Risk Counterparty risk What it means If an ETF uses the swap or access product-based structure, you are exposed to counterparty risk. Therefore, if the counterparty defaults, you could incur significant losses even if the underlying index is unaffected. Your loss will depend on the ETFs exposure to the swap counterparty. This arises if the ETF is significantly exposed to a single swap counterparty or very few swap counterparties. This arises if the same financial institution (or its related party) takes on multiple roles as the manager, swap counterparty, index provider, and market maker of the ETF. If so, the possibility of conflict of interests arises. If collateral is provided, there is a risk that the value of the collateral may decline after a default by the counterparty. Also, the composition of the collateral held may have no bearing to the investment objective of the ETF. There may also be difficulties for the ETF to enforce its rights to the collateral.

Concentration risk Conflict of interest Collateral risk

Risks specific to access products-based Risk Counterparty risk What it means If the access product issuer defaults, the NAV of the ETF may fall, even if the underlying index is unaffected. Your loss will depend on the ETFs exposure to the access product counterparty. This arises if the ETF is significantly exposed to very few access product issuers. In some instances, the ETF may be exposed to only a single issuer. This may be greater for access products because the structure has potentially

Concentration risk Tracking error

greater inefficiency. For example, access product commissions and maintenance charges may be levied on the ETF for each purchase or sale of the access products. Access products have limited duration Conditions governing foreign access to restricted markets may change Collateral risk Access products such as P-notes are of limited duration and may be settled automatically after a certain number of years after their issue. The ETF may be unable to renew the term of the P-notes it holds. The access product issuer may lose access to the underlying shares or to additional shares. If additional shares cannot be obtained, the ETF cannot create more units. This may affect the price of units relative to the NAV. If collateral is provided, there is a risk that the value of the collateral may decline after a default. Also, the composition of the collateral held may have no bearing to the investment objective of the ETF. There may also be difficulties for the ETF to enforce its rights to the collateral.

What fees and charges are there? Find out about transaction charges like brokerage charges and clearing fees from your financial adviser or broker. There are usually no sales charges for ETFs. However, certain charges are payable by all ETFs. These include fees that the fund manager, trustee and other parties charge to the ETF. Although these fees are paid by the ETF and not by the investor, they will increase tracking error.

Key questions to ask or considerations before buying an ETF

ETFs differ in terms of complexity, investment objectives, strategies, risks and costs. When choosing an ETF, consider the following: i) Your needs and investment objectives, personal circumstances and risk profile. ii) Find out more about the ETF you are considering: ensure that the ETFs investment strategies are in line with your own investment objectives ensure that you understand all the risks (whether it is a cash-based or synthetic ETF) and are comfortable the ETF matches your risk profile ensure that you are comfortable that the fund manager has the necessary resources, experience and skills to manage your investment. Check that both the firm and the individuals managing the ETF have a credible performance track record. However, do note that past performance is not necessarily an indication of future performance. iii) Find out about alternative investment products and compare their risk-return profiles and features with the ETF introduced to you.

The above information is prepared in collaboration with the Association of Banks in Singapore, Investment Management Association of Singapore, Securities Investors Association (Singapore) and Singapore Exchange.

Real Estate Investment Trusts

What is a REIT? How are REITs typically structured and what do they invest in? What are the benefits and risks of REITS Conclusion Real Estate Investment Trusts (REITs) are often described as instruments that offer investors the opportunity to invest in a professionally managed portfolio of real estate, through the purchase of a publicly-traded investment product. Individuals invest in a REIT by purchasing units of the trust, similar to shares of a common stock. The investment objective of REITs is to provide unit holders with dividend income, usually from rental income, and capital gains from the profitable sale of real estate assets. While this may sound attractive, it is important to know that REITs, like other investment products, are not completely free from risk. For instance, as with all stocks, REITs do carry market risks. The value of units in publicly traded REITs can therefore fluctuate and investors may receive more, or less, than the original purchase price. This Guide aims to help you understand what REITs are and what you should consider before investing in them. It highlights the benefits and risks of investing in REITs, what you should look out for in the prospectus and other important information.

What is a REIT?
REITs are collective investment schemes that invest in a portfolio of income generating real estate assets such as shopping malls, offices, hotels or serviced apartments, usually established with a view to generating income for unit holders. Assets of REITs are professionally managed and revenues generated from assets (primarily rental income) are normally distributed at regular intervals to you, as a unit holder. Investment goals for REITs are much the same as the goals of an investment in stocks current income distribution and long term appreciation potential. As a unit holder of a REIT, you share the benefits and risks of owning a portfolio of property assets which typically distribute income at regular intervals. REITs normally have regular cash flows as their revenues are derived from rental payments under contractually-binding lease agreements with specific tenures, in most cases. Units of listed REITs are listed on the Singapore Exchange (SGX) and are bought and sold like other listed securities. The first Singapore REIT was launched and listed on the SGX in July 2002. Singapore-listed REITs offer investors access to a diversity of real estate assets including retail malls, office buildings, industrial properties, hotels, serviced apartments and hospitals.

TIP: Do not assume that REITs are low risks and that the dividend income is recurring. Read your prospectus and research reports to understand the investment objective and strategy of the REIT, and look for information under the following three key areas: information on the management company and trustee, their experience and track record; information on properties to be put in the REIT (in particular whether you are familiar with the geographical and sector exposures of the REITs you intend to invest in); other investment information such as dividend policy and fees and charges

How are REITs typically structured and what do they invest in?
REITs are structured as trusts and thus the assets of a REIT are held by an independent trustee on behalf of unit holders. The trustee has duties as laid out in the trust deed for the REIT which typically include ensuring compliance with all applicable laws, as well as protecting certain rights of unit holders. In a typical REIT structure, money is raised from unit holders through an Initial Public Offer (IPO) and used by the company to purchase a pool of real estate properties. These properties are then leased out to tenants; and in return, the income flows back to the unit holders (investors) as income distributions (dividends). In some cases, a sponsor or a major shareholder is also present. For example, if a property developer launches a REIT, he may choose to keep X% (say 30% to 50%) stake in the REITs itself. Like any other investor, the developer in this instance will receive income distributed as dividends, where applicable. The underlying real estate properties are managed by a property manager and the REIT itself is managed by a REIT manager in exchange for a fee. The underlying assets are held by a trustee on behalf of the investors. Each party receives fees in return for his or her services. Most REITs have annual managers fees, property managers fees, trustees fees and other expenses that will be deducted from their cash yields before distributions are made. Some REITs which hold properties in foreign jurisdictions may also be subject to taxation by the relevant jurisdictions. TIP: Always read up on the REITs you are considering. REITs can have different structures, geographical or sector focus, and some REITs may carry more risk, such as political and regulatory risk, than others. Read the Investment Approach and Risks portions of your prospectus for information on the various risks of the specific REIT you intend to invest in. Note that the risk elements may differ greatly between REITs depending on their investment objective and strategy, geographical and sector focus, quality of the underlying real estate properties, experience of the REIT manager, and the income distribution policy. Consider if the REITs structure and risk profile suit your risk appetite and investment time horizon. Do not invest in a REIT if you do not understand or are not comfortable with its investment objective and strategy.

What are the benefits and risks of REITS

As with all investment products, it is important to weigh the risks and benefits and assess whether the product fits with your risk appetite and your overall financial plan. Benefits of REITs The unique characteristics and features of each REIT, such as its portfolio of assets and focus on generating income as regularly as possible, can translate into benefits for investors. Diversification : REITs typically own multi-property portfolios with diversified tenant pools. This reduces the risk of relying on a single property and tenant which you face when you directly own a real estate property. For

example, if the MRT station next to your apartment closes down, its value would probably fall. The impact of such stand-alone risk is diluted when you invest in a pool of properties through a REIT. You could diversify further by selecting REITs based on the type of properties or region you want to invest in (Singapore listed REITs, or S-REITs have a diverse range of assets such as hotels, shopping malls, office buildings; in Singapore as well as other countries such as China). Affordability: The REIT investor enjoys the advantage of the power of the pool of capital to acquire interests in much larger opportunities than would be available to their personal capital alone. For example, individual investor may not be able to afford a direct investment into a large asset such as Suntec City or shopping malls in China. By investing in a REIT, you get to invest in these large assets in bite-size chunks. Liquidity: Compared to investing directly in real estate properties, REIT investment offers the advantage of liquidity the ease of converting assets into cash. REITs are listed on the stock exchange and you can trade a REIT throughout the trading day, and it is easier to buy and sell a REIT than to buy and sell properties. Tax Benefits: Individual investors enjoy a tax-exempt distribution which comes in the form of dividends in the REITs structure. Transparency and Flexibility: The process of buying or selling a REIT is transparent and flexible, just like trading stocks listed on the exchange. Investors can access information on the REIT prices and trade REITs throughout the trading day. Moreover, there are a lot of external controls and monitoring of REITs, which increase transparency and corporate governance. For example, REITs are required to distribute at least 90% of taxable income each year to enjoy tax exempt status by IRAS (subject to certain conditions) . See Table 1 for a comparison of features between investing in REITs and investing in property stocks. Table 1: Comparison of features between REITs & Property Stocks REITs Business Focus Investment in income-generating properties Properties are held on trust by an independent trustee Must pay out at least 90% of net income after tax Subject to the Property Funds Appendix in the Code on Collective Investment Schemes Yes Property Stocks Generally property related, but may diversify into other unrelated activities or industries Properties are held by the company Subject to the decision of the board

Safe Custody of Properties Dividend Policy Investment and Leverage Guidelines Tax-Exempt Income (dividend) Traded Through Broker Management Fees Clearing Fees

None

No

Yes Yes Yes

Yes No Yes

Brokerage Commission Settlement

Yes Third Business Date after Trade Date

Yes Third Business Date after Trade Date

*Most REITs have annual managers fees, property management fees, trustees fees and other expenses that will be deducted from their cash yields before distributions are made. Risks of REITs The risks associated with a REIT investment vary and depend on the unique characteristics and features of each REIT, as well as the geographical location of the investments. Do not simply look at the expected yield, but also consider the concentration, quality and lease length of the underlying properties. Some of the risks associated with investing in REITs include: Market Risk: REITs are traded on the stock exchange and the prices are subject to demand and supply conditions, just like other stocks. Investors could receive less than the original investment amount when they sell their units in a REIT. The prices generally reflect investors confidence in the economy, the property market and its returns, the REIT management, interest rates, and many other factors. Like other stocks, investors must be able to tolerate such price movements. Income Risk: Dividends may not be paid if a REIT reports an operating loss. For example, tenancy agreements of the underlying properties could be renewed at a lower rental rate than the previous agreement or the occupancy rate could fall. You should consider whether the REIT has taken any measures such as procuring payment upfront or contractual lock-ins of rental rates and other clauses in tenancy agreements. Similarly, if the underlying properties are financed by debts, there is a refinancing risk when cost of debt varies. A higher cost of debt may also reduce the income distributions to unit holders. Concentration Risk: If a substantial portion of the value of a REITs assets is derived from one or a few properties, you may be exposed to a greater risk of loss if something untoward should happen to one of these properties. Similarly, if a REIT depends on only a few tenants for its lease income, you are exposed to a greater risk of these tenants not being able to fulfill their lease obligations. Liquidity Risk: Although investors are able to exit their investments easily by selling it on the exchange, the real estate fund itself may be relatively less liquid compared to funds investing in financial securities such as stocks and bonds. This is because it is difficult to quickly find buyers and sellers for property, especially if the value of the property is high. As a result, it may be difficult for REITs to vary their investment portfolio or sell its assets on short notice should there be adverse economic conditions or exceptional circumstances. Leverage Risk: Where a REIT uses debt to finance the acquisition of underlying properties, there is leverage risk. As is the case with other listed companies, in the event of an insolvency of the REIT, the assets of the REIT will be used to pay off debtors first. Any remaining value will then be distributed to unit holders. Refinancing Risk: As REITs distribute a large amount of their income to unit holders, they may not have the ability to build up cash reserves to repay loans as they fall due. Thus they will typically seek financing by entering into new borrowing agreements, or other capitalization measures such as rights or bond issues. One potential risk is higher refinancing cost when loans are due for renewal. Another risk is that a REIT which is unable to secure refinancing may be required to sell off some properties if they are mortgaged under the loan. These risks could affect the unit price and income distribution of a REIT. Other Risks: While some REITS can offer diversity based on the type of properties or region you want to invest in, such diversification could carry other risks such as sector and country regulation risk.

Conclusion
As with any other investment product, investors should also take time to understand the product and consider whether it is suitable for them. Here are a few key things you should check before deciding whether to invest in a REIT. i) What does the REIT invest in? Do not assume that all REITs come with low risks and are intended for long term investing. Read your prospectus and research reports to understand these key areas: the sector and geography factor (in particular the stage of property cycle in the assets home countries, the economic outlook for that country, any political or regulatory risk, any tax considerations); and the underlying assets (in particular the asset quality, such as branding of a shopping mall, occupancy rate and the tenant mix). ii) How is the REIT structured? Read the Investment Approach and Risks portions of your prospectus for information on the various risks of the specific REIT you intend to invest in. Note that the risk elements may differ greatly between REITs depending on their structure. Do also find out: Who are the people managing the underlying assets? For example, the management quality, such as its reputation and track record, its strategy for growth. If there is a sponsor, who is the sponsor and what is the strength of the sponsor? What are the expected fees (i.e. brokerage commission, management fees, trustees fees & expense ratio)? What is the gearing (leverage) and debt maturity of the REIT? Are there unique features of the specific REIT which may give rise to additional risk? iii) What is the dividend distribution policy? Find out: What is the expected frequency and timing of dividend payment? What are the adjustments made to income in determining the amount to be distributed? What are the circumstances under which a REIT may not pay dividends, e.g. an operating loss, downward revaluation of properties, or insufficient cashflow? iv) Does the REITs structure and risk profile suit your risk appetite and investment time horizon? v) How does the REIT you are considering compare with other investment options? Last but not least, if you find that you do not understand the REIT or are not comfortable with its structure and risks, do not invest in it.

The above information is prepared in collaboration with the Singapore Exchange Limited (SGX).

Structured Deposits
What is a structured deposit? Are structured deposits suitable for everyone? What features and risks do structured deposits have? How do they compare with fixed deposits? What types of structured deposits are available? What to watch out for - What can cause me to lose money? What documents should you receive?

What is a structured deposit?

A structured deposit combines a deposit with an investment product. The return on a structured deposit depends on the performance of an underlying financial asset, product or benchmark. These may include market indices, shares, interest rates, market indices, bonds or other fixed-income securities, foreign exchange rates, or a combination of these. A structured deposit is different from a fixed deposit. Structured deposits may provide the potential for higher returns compared to fixed deposits, but you take on more risks when you buy a structured deposit, including the risk that you receive returns that are lower than expected. At maturity, you will receive the principal amount of the structured deposit. But just like traditional deposits, the return of the principal and any returns is subject to the credit risk of the bank holding the deposit. If the deposit is withdrawn early, you may not receive 100% of the money invested back. Please note that structured deposits are not protected under the Deposit Insurance Scheme. What is the return? Your return is variable and depends on the performance of the underlying financial asset, product or benchmark. These may include market indices, shares, interest rates, bonds or other fixed-income securities, foreign exchange rates, or a combination of these. Your return is calculated according to a formula set out in the structured deposits terms and conditions. The returns you receive may further depend on whether there is i) a "cap" on the underlying financial asset, product or benchmark; and / or ii) a participation rate. Example: A 5-year structured deposit that is linked to an equity index rises by 20% at maturity: If there is a "cap" (maximum return) of 15%, your return will not be more than 15%.

If there is a participation rate of 40%, you will only participate in 40% of the 20% rise in the equity index, i.e. 40% x 20% = 8%. If your return is subject to both the "cap" and the participation rate, you will receive 40% of the 15% "capped" return. Your potential return is therefore 40% x 15% = 6%. The final return in each of the examples above is not the effective rate of return. Do ask the bank for the effective rate of return. Why do people invest in structured deposits? Structured deposits provide the potential for higher returns compared to fixed deposits, but you are exposed to more risks when you buy a structured deposit. Structured deposits may be suitable for investors who want exposure to assets or markets which are not easily accessible to retail investors. Investors receive the principal invested if the structured deposit is held to maturity, provided there is no default on the part of the deposit-taking bank. What is the maximum amount you can lose? You may lose some or all of your return depending on how the return is structured and whether the underlying financial asset, product or benchmark underperforms. The principal amount you invest is also subject to the credit risk of the bank your structured deposit is held with. Further, if you withdraw the deposit early, you may not receive 100% of the principal you invested.

Are structured deposits suitable for everyone?

Not everyone should invest in structured deposits. Do not consider this type of investment if you: Want potentially higher returns BUT are not prepared for variable returns which include the risk of not receiving a substantial part of the interest payable on the deposit or receiving lower than expected returns; Do not understand how returns are calculated or are unclear about the factors and scenarios that can affect returns; Do not understand the risks associated with the structured deposit. Structured deposits use derivatives to hedge risks and/or to improve performance. Investors should be aware of the risks associated with the use of derivatives, including the risk that the provider or counterparty of the derivative defaults. Are not prepared to leave your money tied up for the periods required. If you need to convert your investments to cash in the short-term to meet specific needs every now and then, a structured deposit may not be suitable for you. Are not comfortable with the credit risk of the bank offering the structured deposit. If the bank defaults, you could lose all of your investment.

What features and risks do structured deposits have? How do they compare with fixed deposits?
Here is a comparison of the main features and risks of structured deposits and fixed deposits. Check the terms and conditions of the structured deposit for details: Features Minimum deposit Structured Deposits A higher minimum investment amount may be required (usually $5,000). S$ Fixed Deposits Minimum amount for a fixed deposit can be less at

$1,000. Maturity Principal Returns Maturity periods vary from 2 weeks to 10 years. Principal (or capital) will be repaid in full at maturity or if bank redeems (or calls) deposit before maturity. Potentially higher returns compared to fixed deposits. But you are exposed to more risks. Returns depend on performance of underlying asset or index. Returns you receive may further depend on: i) "cap" rate on underlying asset or index; and / or ii) participation rate. Risks involved Riskier than traditional deposits because returns depend on performance of other assets or indices. You may receive no returns although you would be repaid principal invested. Where a structured deposit is callable, you may be exposed to reinvestment risk, i.e. risk of having to reinvest your money at less attractive rates. Investor is also exposed to credit risk of deposit-taking bank, i.e. risk that bank defaults on payments due to you. Early withdrawal by depositor May lose part of return and / or principal if deposit is withdrawn before maturity. Amount repaid depends on market value of underlying asset or index linked to structured deposit. Structured deposits may not be valued daily. If so, you may not be able to withdraw your deposit immediately. Early redemption / callable by issuer (variable maturity) Deposit Insurance Scheme Guaranteed payments Structured deposit may allow bank to "call" or redeem the deposit early. This means the maximum returns to you are capped. You should receive full amount of principal invested if the deposit is redeemed early. No early redemption by bank. Maturity periods from 1 month to 3 years. Principal (or capital) will be repaid in full at maturity. Returns on fixed deposits are usually lower. Funds are normally placed in money markets for a short period of time (for example, overnight). Fixed deposits are considered low-risk as banks are obliged to repay the principal in full at maturity. However, depositors are exposed to credit risk of deposit-taking bank, i.e. risk that bank defaults on payments due to you. Early withdrawal may attract certain bank charges.

Structured deposits are not covered by the Deposit Insurance Scheme. Some structured deposits provide higher guaranteed early payments compared to traditional fixed deposits. Such payments are usually only for the first few months or years; payments in later years may be variable. Ask about the effective rate of return for the structured deposit you are considering.

Fixed deposits are covered by the Deposit Insurance Scheme. Interest is guaranteed and fixed throughout term of fixed deposit (provided there is no early withdrawal).

What types of structured deposits are available?

Here are some of the types of structured deposits available: Type of structured deposit Description

Equitylinked Bondlinked Bondlinked Interest ratelinked

May be linked to return of a single share, basket of shares, equity index (for example, the S&P 500) or a basket of indices. May be linked to return of a single bond (for example, Singapore Government Securities), basket of bonds, bond index, or a basket of bond indices. May be linked to a specified floating interest rate (for example, the Singapore Interbank Offer Rate). Returns may be directly linked to the specified interest rate, i.e. if the specified interest rate rises, your returns will rise and if the interest rate falls, your returns fall. But some returns are inversely related, i.e. when the specified interest rate falls, you get better returns and if the interest rate rises, your return falls. Such products are usually called "inverse floaters" or "reverse floaters". Payments may also rise or "step up" on fixed dates if deposit is not redeemed by issuer.

Creditlinked

May be linked to credit quality of a specified entity or entities. If there is a "credit event" (for example, if specified entity becomes insolvent or defaults on its loans), there may be no return for investor.

What to watch out for - What can cause me to lose money?

You can lose money if the underlying asset or index performs below your expectations. Here is a brief description of the key market risks involved for some commonly available structured deposits: Type of Structured Deposit Equitylinked Key market risk involved

The underlying share, basket of shares, share index or basket of indices, may not move in the direction and / or by the amount you expected. If returns are capped, you bear the risk of foregoing potentially higher returns that you could have received from investing directly in the underlying asset.

Bondlinked

The underlying bond, basket of bonds, bond index or basket of bond indices, may not move in the direction and / or by the amount you expected. If returns are capped, you bear the risk of foregoing potentially higher returns that you could have received from investing directly in the underlying asset.

Interest ratelinked Creditlinked

Returns depend on direction and / or amount by which interest rates move. You are exposed to risk that interest rates do not move in the direction and / or by the amount you anticipated. Returns are exposed to the credit risk of specified entities and / or to the credit risk and change in market value of the underlying collateral, if any. You must be able to assess the likelihood of a credit event occurring to specified entities as well as entities that constitute the underlying collateral.

In addition, some of the risks that apply generally to structured deposits are listed below. Please note that there may be transaction or unwinding costs associated with early or mandatory redemption which could lower the amount you receive. Risks Explanation

Reinvestment risk Liquidity risk Credit risk

If a structured deposit is called or redeemed before maturity, you are exposed to reinvestment risk if you have to reinvest your money at less attractive interest rates. There is limited liquidity for structured deposits. You cannot sell a structured deposit to another investor. You can only deal with the bank holding your structured deposit. You are exposed to the credit risk of i) the deposit-taking bank and may be exposed to the credit risk of ii) the derivative counterparty, depending on the structure. Credit risk refers to the risk of default by a bank (or derivative counterparty) on its payment obligations when due. Structured deposits are not covered under the Deposit Insurance Scheme.

What is a tranche? Structured deposits may be offered in tranches. Each tranche has either a fixed offer period or is available until the tranche is fully subscribed. The tranches may come with differing features and returns. What fees and charges are there? Please check with your bank to find out about fees. If you make an early withdrawal, you may have to forgo some of your returns as there could be transaction or unwinding costs.

What documents should you receive?

There is no specific document to be provided by your financial adviser representative but he is required to tell you about the products features and risks, fees and charges, provisions for early termination, as well as any warnings, exclusions or disclaimers which may apply. He must also tell you about the product provider. When choosing a structured deposit, consider the following: i) Your needs and goals/objectives, personal circumstances and risk profile ii) Find out more about the structured deposit you are considering: ensure that an investment in the structured deposit is in line with your own investment objectives; ensure that you understand the factors that will impact your returns; are you familiar with the underlying financial asset, product or benchmark and are you comfortable with the exposure and the market view you are taking? ensure you understand all the risks and are comfortable that they match your own risk profile you should be comfortable with the credit risk of the bank you are placing your money with. iii) Find out about alternative investment products and compare their risk-return profile and features with the structured product introduced to you.

The above information is prepared in collaboration with the Association of Banks in Singapore and Securities Investors Association (Singapore).

Contract for Differences

What is a Contract for Differences (CFD)? What is the maximum amount you can lose? What is the worst that can happen? Are CFDs suitable for everyone? What should you watch out for? What are the key risks involved? How does the product work? What are the costs involved? Is short selling allowed? Key questions to ask before trading CFDs

What is a Contract for Differences (CFD)?

A CFD allows you to speculate on future market movements of the underlying asset, without actually owning or taking physical delivery of the underlying asset. CFDs are leveraged instruments. CFDs tend to be traded over-the-counter with a securities firm, known as a CFD provider. CFDs are available for a range of underlying assets, e.g. shares, commodities and currencies. In this guide, examples showing how they work will refer to shares as the underlying asset class. A CFD involves two trades: Firstly, you enter into an opening trade with a CFD provider at one price. This creates an open position which you later close out with a reverse trade with the CFD provider at another price. If the first trade is a buy or long position, the second trade which closes the open position is a sell. Conversely, if the opening trade was a sell or short position, the closing trade would be a buy. The CFD captures the price difference of the underlying asset between the opening trade and the closing-out trade. Where you hold a long position in the CFD: If closing out price > opening price If closing out price < opening price CFD provider pays you the difference between the opening and closing out prices of the CFD You pay the CFD provider the difference between the opening and closing out prices of the CFD

Where you hold a short position in the CFD: If closing out price < opening price If closing out price > CFD provider pays you the difference between the opening and closing out prices of the CFD You pay the CFD provider the difference between the opening and closing out

opening price

prices of the CFD

The proceeds you pay or receive will be subject to commissions, financing charges, other charges or other adjustments made by the CFD provider. CFDs are leveraged trading instruments; they are traded on margin. Instead of paying the full value for the underlying shares, you pay an initial margin to open the position and are required to maintain some minimum margin level for open positions at all times. You may be required to satisfy the margin calls at very short notice, especially in volatile markets. If you fail to top up your margin when required, you risk having your position liquidated at a loss. What is the return? The CFD captures the price difference of the underlying asset between the opening trade and the closing-out trade. Why trade CFDs? A CFD allows you to speculate on the future market movements of an underlying asset, without actually owning or taking physical delivery of the underlying asset.

What is the maximum amount you can lose? What is the worst that can happen?
Trading in leveraged products like CFDs potentially exposes you to a higher risk of loss than if the products were not leveraged. With leveraged products, you may lose more than what you originally invested depending on the positions you take. As an investor, you pay an initial margin to open the position and are required to maintain some minimum margin level for open positions at all times. You may be required to satisfy the margin calls at very short notice, especially in volatile markets. If you fail to top up your margin when required, you risk having your position liquidated at a loss.

Are CFDs suitable for everyone?

Not everyone should trade CFDs. Do not consider CFDs if you: Want potentially higher returns BUT are not prepared for volatile returns which include the risk of suffering unlimited losses beyond your original investment amount; Do not understand or are unclear about the factors and scenarios that can affect CFD prices; Do not understand the risks associated with CFDs. Do not have the time and resources to monitor the markets, and respond to margin calls to cover your losses at short notice or risk having your position closed at a loss. Do not have the appetite and financial capacity to withstand the losses that may arise if your view on the future price direction of the CFDs underlying share proves wrong.

What should you watch out for? What are the key risks involved?
Market risk You are likely to enter into a CFD when you have an opinion of the future direction of the price of an underlying asset and want to take a position reflecting this view. The risk you take is that your view turns out to be wrong. Given that CFDs are bought or sold on margin, the leverage will have the effect of magnifying the loss. In some cases, the loss is potentially unlimited and can be much more than the cost of the initial margin.

Some CFD providers may offer stop loss or limit order measures which allow you to limit losses by setting price triggers to close the open position. Do check with your CFD provider if this is available to you. Counterparty risk This is the risk that the CFD provider fails to meet a payment obligation due to you, for example, if your CFD provider becomes insolvent. As a CFD buyer, you have no recourse to the underlying shares as you have not actually bought the underlying shares. Pricing of CFDs There are currently two CFD models in the market: i. Market Making model: The CFD provider makes bid-offer prices for the CFDs provided. Prices quoted by the CFD provider may or may not match the exchange traded price of the underlying share. ii. Direct Market Access: When you give an order to buy or sell a CFD to the CFD provider, the CFD provider sends a corresponding order on the underlying share to the exchange for execution. The DMA model should mean that CFD prices more closely match the exchange traded price of the underlying share. You may wish to clarify this directly with your CFD provider. Currency risk You face currency risk if the CFD is quoted in a currency which differs from the currency of the underlying share. Even if the currency of the CFD and the underlying share is the same, you are still exposed to currency risk if the currency is different from your own base currency.

How does the product work?

Trade on margin CFDs are traded on margin. This means you pay a small proportion of the value of the underlying shares (typically between 10% and 30% set by the CFD provider) to open the position, instead of paying the full value for the underlying shares. Example 1: Initial Margin Suppose the shares of XYZ Ltd, are quoted at an offer price of $2.00 and Mr A intends to buy 2,000 shares of XYZ Ltd as a CFD at the offer price of $2.00. Assuming the CFD provider sets the margin of the CFD at 10%, the initial margin Mr A puts up will be 10% x $2.00 x 2000 = $400.

Mr A will be able to open the position with $400 versus a payment of $4,000 for the underlying shares. How leverage magnifies profits and losses The leveraging effect means that if the markets move in favour of or against Mr As position, Mr As respective profits or losses will be magnified. Here are some examples of how leverage impacts Mr As profits and losses. Example 2: Example of a Profit

Suppose on the next day, the shares of XYZ Ltd have risen and are quoted at a bid price of $2.05. Mr A then decides to sell his CFD at $2.05. He will gain a profit of $100 [($2.05- $2.00) x 2000]. The return on investment (ROI) from the CFD works out to 25% (100 400). This compares to an ROI of about 2.5% (100 4,000) if he had invested directly in the underlying shares. Mr A will receive from the CFD provider $100 less any financing and transaction costs and commissions due from him.

Example 3: Example of a Loss Conversely, if the market moves against Mr As position and the shares of XYZ Ltd are quoted at $1.95, Mr A may choose to sell his shares at $1.95 to avoid incurring further loss. Mr A will incur a loss of $100 [($ 1.95 $2.00) x 2000] from trading the CFD. In this example, the ROI for investing in the CFD would be -25% (-100 400), as compared to an ROI of -2.5% (-100 4,000) if he had invested directly in the underlying shares. However, Mr A will end up paying more than $100 to the CFD provider, once margins, financing and transaction costs and commissions are factored in.

Continuous margin adjustments At any time that the markets move against your open position, the CFD provider will require you to top up your margin to cover your losses. In the above Example 3, if Mr A intends to keep the position open, the $100 loss will be deducted from the initial margin and he will be required to top up his margin with additional funds (known as a margin call) to the initial amount of $400, or to a level prescribed by the CFD provider. The prescribed margin should be made known to you before entering into the CFD. You will usually be required to make the top up within a short period of time (e.g. within 2 days or less as required by the CFD provider). Otherwise, the position may be closed at a loss to you. This process of valuing the profit and loss of open positions is called "marking to market". This, coupled with managing margin requirements, is a continuous process. If you want to trade CFDs, you must be financially prepared to top up margins at short notice, especially when markets are volatile.

What are the costs involved?

Costs relating to CFD trades may include bid-offer spreads, commissions, daily financing costs, account management fees and Goods and Services Tax (GST). The commission charge is usually a percentage of the total value of the underlying shares and paid on a per transaction basis. The cost of the trading services may also be quoted in the form of a bid-offer spread on the CFD. Do clarify this with the CFD provider before trading in CFDs. Example 4 Suppose XYZ Ltd is quoted at $2.00 and Mr A intends to buy 2,000 shares of XYZ Ltd as a CFD at $2.00. The commission, assuming that the rate is 0.5%, to be debited is $2.00 x 2000 x 0.5% = $20.00.

Financing charges may be calculated on the total value of the underlying shares of the CFD. Some providers may however charge based on mark to market value instead of the opening or initial contract value. Example 5 If Mr A holds 2000 shares as a CFD overnight, he will incur daily financing interest which may be set at say 5% of the initiated contract value. If the opening CFD price of the shares is $2.00, the daily interest charge will be ($4,000 x 5% / 360 days) = $0.56.

The commission charged by the CFD provider is subjected to Goods and Services Tax (GST). Example 6 If the commission charged is $20.00, GST (at 7% of $20.00) of $1.40 will be levied.

Is short selling allowed?

Various restrictions apply to short selling in the stock markets. CFDs, however, allow you to take short positions, without having to first own the underlying shares. But taking short positions can be very risky and can potentially lead to unlimited losses. Example 7 Suppose Mr A expects the shares of XYZ Ltd, quoted at $2.00, to fall. He can sell 2000 shares at $2.00, as a CFD. The initial outlay to open the position will be $400 (10% x $2.00 x 2000). After 7 days, the shares of XYZ Ltd are quoted at $1.95. Mr A decides to close the position by buying 2000 shares at $1.95 as a CFD. The profit made will be $100 [2000 x ($2.00 - $1.95)] or 25% ROI, although the actual amount received will be less once transaction and other costs are deducted. However, if his view had turned out to be wrong and the price had moved in the opposite direction by $0.05, the investor would have incurred a loss of $100 or -25% ROI. In this case, the amount he has to pay the CFD provider will be $100 plus transaction and other costs. If his view had turned out to be very wrong and the price had moved up by $0.20, the investors loss would be $400 [2000 x ($2.00 - $2.20)] or -100% ROI. In this situation, he would have lost his entire initial investment of $400. Any further gain in price beyond $2.20 would result in further losses to the investor. In other words, he faces unlimited losses in this scenario.

Do CFDs expire? What happens then? CFDs may or may not have expiry dates. It is decided by the CFD provider. Do clarify this with your CFD provider. For those with expiry dates, you will have to close out your position at expiry. If you wish to maintain your exposure to the underlying shares beyond the expiry of the CFD, you will have to initiate a new position by entering into a new CFD. The position is said to be "rolled over" and the profits or losses are realised when the original position is closed. The new CFD position may be subject to commissions and financing charges. Meanwhile, your account may require adjustments to margin, as well as to reflect current profit and loss status.

Do be vigilant about monitoring open positions where there is no expiry date. What are my rights in corporate actions as a CFD buyer? As a CFD buyer, you will not have bought the underlying shares. Do check with your CFD provider as well as check what rights you have as a CFD buyer. Buyers of CFDs may be entitled to adjustments to their CFDs, if dividends on the underlying shares are paid by the respective companies.

Key questions to ask before trading CFDs:

1. Do I fully understand how CFDs function, their features and risks? Do I fully understand the risks of investing in a leveraged product like CFD? Am I comfortable with the risks? How does leverage affect my losses? 2. Do I have the appetite and financial capacity to withstand the losses that may arise if my view on the future direction of the CFDs underlying share proves wrong? Such losses can be significantly higher than the initial margin invested. In cases of short selling, it may lead to unlimited losses. Can I afford to lose some or all of my financial capital when trading CFDs without endangering my overall financial plan and goals? 3. Do I have the time to monitor the performance of the underlying shares and rates offered by the brokerage closely? Will I be able to react quickly enough to limit any losses I may suffer? When will a margin call be issued, and what can the company do if I fail to meet margin call? Under what circumstances can the company close my position? 4. Can I place stop loss and limit orders, which will help to limit my losses? Will I be charged to place or change these orders? What additional services will be provided by the CFD provider? Do I have to pay extra for these services? If I place a stop-loss order, am I assured of the price that I set the stop-loss at? 5. As a buyer in a CFD, what rights do I have? Are these rights different from those of a shareholder of the underlying shares? Can I sell the CFD when the underlying share is suspended? What happens when trading in the underlying asset is suspended or halted? How can I exit my position and will I suffer losses? 6. Does the CFD have an expiry date? If so, when? What if I wish to continue with the CFD after the expiry date? 7. What are the costs I have to pay? What margin, commission, transaction and financing charges are there? 8. Where are the margins and deposits that I have placed with the CFD provider kept and maintained? Will I be able to get back my margins and deposits if the CFD provider becomes insolvent? How long will the recovery of my moneys take? 9. How is the derivative contract quoted? Can the trade be executed at a price that is different from my order price? 10. Is the CFD provider I am going to engage authorised or licensed to deal in CFDs? Do check the Financial Institutions Directory on the MAS website whether the firm has the requisite authorisation or licence.

The above information is prepared in collaboration with the Securities Association of Singapore.

Investment-Linked Insurance Policies

What is an Investment-linked Insurance Policy (ILP)? What is the difference between an ILP and other life insurance policies? What risks do ILPs have? How much would an ILP cost? How much of the premium is used to purchase units? Can you invest with your CPF savings? Are ILPs suitable for older people? Keeping track of your ILP

What is an Investment-linked Insurance Policy (ILP)?

Investment-linked insurance policies (ILPs) have both life insurance and investment components. Your premiums are used to pay for units in investmentlinked sub-fund(s) of your choice. Some of the units you buy are then sold to pay for insurance and other charges, while the rest remain invested. ILPs provide insurance protection in the event of death or total and permanent disability (TPD), if included. Depending on the policy, the death or TPD benefit may comprise the higher of the sum assured or value of ILP units or some combination of the sum assured and the value of ILP units. How much is paid depends on the value of the units of the sub-fund at the time. Some consumers prefer ILPs because they want more exposure to investments than other life insurance products may provide. But if you are more concerned about getting insurance coverage, make sure the product you buy meets this need. You may need to consider other life insurance products. ILPs can be classified into two categories: Single premium ILPs Regular premium ILPs You pay a lump sum premium to buy units in a sub-fund. Most single premium ILPs provide lower insurance protection than regular premiums ILPs. You pay premiums on an on-going basis. Regular premium ILPs may allow you to vary the level of insurance coverage you need.

Unlike whole life or endowment participating policies, ILPs usually do not have guaranteed cash values. The value of the ILP depends on the price of the units in the sub-fund which in turn depends on the sub-funds performance.

Some investment products have been categorised as Specified Investment Products (SIPs). Do check with your financial institution whether the product you are considering is an SIP. For information on the requirements in place when transacting SIPs, please refer to the Consumer Guide on SIPs requirements. While the premiums of an ILP remain constant throughout the life of the policy, the cost of insurance coverage increases year by year as you get older. This means more units may be sold to pay for the insurance charges, leaving fewer units invested to accumulate cash values under your policy. Investment-linked sub-funds ILP sub-funds have different features and risks, catering to different consumer preferences. The sub-funds invest in portfolios of assets according to the stated investment objective for the fund. The sub-fund may be managed by the insurer or the insurers appointed third party fund manager(s). What are the benefits? Some consumers prefer ILPs because they want more exposure to investments than other life insurance products may provide. There is a range of sub-funds to choose from and most regular premium ILPs give you the flexibility to vary the insurance coverage and investment mix according to your changing financial needs. Choice of sub-funds ILPs offer a range of sub-funds that you can choose from. It is important to understand the sub-funds investment strategy and approach, as well as the potential risks. Choose a sub-fund(s) that suits your investment objectives, risk profile and time horizon. Do not assess the subfunds return only. Make sure you are comfortable with the sub-funds risks and that these are consistent with your risk profile. Some investments offer greater potential for higher returns but come with an increased likelihood of losing money or not performing as expected by the end of your investment horizon. On the other hand, cash sub-funds may be expected to yield more modest returns in exchange for relative safety. Do not be tempted to take on more risk in exchange for potentially higher returns. Do compare the suitability of the ILP with other investment products. Please be aware that if you have a combination of high insurance coverage and a poorly performing investmentlinked sub-fund, the value of the units in your policy may not be adequate to pay the insurance coverage charges. If so, you will have to increase your premium payment to pay for insurance coverage. For investments under the CPF Investment Scheme, the CPF assigns a risk classification to all participating ILP sub-funds. For more information, please refer to the CPF Board website. Risk classifications can only be a very broad guide. What if you want to switch sub-funds? ILPs allow you to move your money from one sub-fund to another. This is known as fund switching and may be helpful if your financial circumstances and risk appetite have changed and you no longer find your current subfund suitable. When selecting or switching sub-fund(s), do take your ability and willingness to take risk, investment objectives, time horizon and other personal circumstances into consideration. Most insurers offer a limited number of free switches and charge a nominal fee per switch thereafter. Before switching from one sub-fund to another, check whether you are entitled to free switches and if not, how much you would need to pay for the switch. How can you monitor your sub-funds performance?

You can monitor your investment-linked sub-funds by checking the unit prices published daily in newspapers including The Straits Times, The Business Times and Lianhe Zaobao. Some insurers also publish unit prices on their website. Flexibility Most regular premium ILPs give you the flexibility to vary the insurance coverage and investment mix if your financial needs change. You may top up your investments, make withdrawals and switch sub-funds. But any increase in coverage will be subject to underwriting. You may also request premium holidays, during which you can stop paying premiums temporarily without having to terminate your policy. Do check the Policy Contract and Product Summary for the various charges which apply when you make these changes.

What is the difference between an ILP and other life insurance policies?
The key differences between ILPs and other life insurance policies, such as participating whole life and endowment policies and term insurance policies, are summarised in the following table: ILPs Investment Mandate Part of your premiums is invested in units in your chosen sub-fund. Returns are directly linked to the value of the underlying assets. You can track the sub-funds performance via the daily publication of unit prices. Whole Life, Endowment & Term Plans For participating policies, all of your premiums go into the insurers participating fund. The insurer decides the investment objective and approach for the fund taking into account the insurers overall liabilities. The funds performance depends on its investment performance, claims experience and expense levels of the fund. Term insurance policies do not provide investment returns. Bonuses There are no bonuses. The ILPs value depends on the performance of your chosen sub-funds. For participating whole life and endowment policies, bonuses depend on the performance of the fund. They are not guaranteed, but once declared by the insurer, they become vested and are guaranteed. Non-par and term policies do not pay bonuses. Returns from policy track the ups and downs of investment markets? Assets of policyholders identifiable? Cash Value Yes, the returns are directly linked to the value of the assets in the sub-funds. For participating whole life and endowment policies, the smoothening of bonuses means that the returns from your policy will not necessarily track the ups and downs of investment markets

Assets for each ILP policyholder are identifiable in the form of units held. You may withdraw the cash value of the units allocated to you, subject to possible surrender charges. Early termination of the policy may be costly and the cash value payable may be less than the total

Assets of participating policyholders are maintained at the fund level. Whole life and endowment policies build up cash value after a few years. Early termination of the policy may be costly and the cash value payable may be less than the total premiums paid. Term insurance policies do not have any cash value.

premiums paid. Are cash values guaranteed? Investment Risk No, cash values depend upon the value of the sub-funds units and are usually not guaranteed. The investment risk is borne entirely by you. A part of the cash values under a participating policy will be guaranteed. There are two categories of benefits those which have been declared and are guaranteed and nonguaranteed benefits. For guaranteed benefits, the insurer bears the investment risk. But nonguaranteed benefits (i.e. potential benefits arising in the future) depend on how the insurers participating fund performs. The amount of premium used for insurance coverage, charges and investment are bundled. They are not separately identified in the Product Summary and Policy Contract.

Premium Breakdown

The amount of the premium used for insurance coverage, charges and buying units are unbundled and transparent. They are disclosed in the Product Summary, Benefit Illustration and Policy Contract.

What risks do ILPs have?

Returns are not guaranteed ILPs carry investment risks. The value of an ILP varies, depending on how the sub-fund you have chosen performs. The returns are not guaranteed. Do note that the past returns of a sub-fund are not necessarily indicative of the future performance of the sub-fund. Units may be insufficient to pay the insurance coverage charges Insurance coverage charges usually increase as you grow older, as the risk of death, disability and illness increases with age. This is even if you maintain the same coverage (sum assured). The increasing cost is factored into the amount of premiums we pay. Even if you are paying the same monthly premium, more units may be deducted to pay the higher insurance coverage charges, thus leaving fewer units for investment. If you have a combination of high insurance coverage and a poorly performing investment-linked sub-fund, the value of the units in your policy may not be adequate to pay the insurance coverage charges. In such a scenario, you will have to increase your premium payment or reduce the insurance coverage. Apart from increasing charges due to age, in the case of regular premium ILPs, insurers may also increase the cost of insurance coverage, subject to limits stated in the Policy Contract, if there has been a general and sustained worsening of claim experience. Generally, any increase would be applied to an entire class of policy and not just to an individual policy.

How much would an ILP cost?

Fees and Charges You can find the details of all the charges of an ILP in its Product Highlight Sheet (PHS), Product (Fund) Summary and Policy Contract. The different types of fees and charges are as follows: Fees and charges Insurance coverage charges What it is Pays for death and other coverage provided for.

Charges depend on factors, such as amount of coverage you want, age, gender and whether you smoke. Charges increase with age and are usually funded by the sale of units purchased with your premium. Fund management fees Policy/administration charges Surrender charges Payable to the fund manager for managing the sub-fund. Fees for administration of the policy. Payable for partial or full sale of units before a certain time period. Before selling your units, make sure there are enough units left to sustain the insurance cover you want. Bid-Offer Spread Units are bought at offer price, and sold at bid price. The difference between offer and bid prices is called the spread and is usually 5%. The spread pays for distribution costs, marketing and other general administration expenses. Fund Switching Charge A limited number of fund switches are allowed each year without charge. Subsequent switches will be subject to a charge.

Note that fees and charges may not be guaranteed and are subject to change. These fees and charges (including distribution costs such as commissions) are typically deducted from the (monthly) sale of units.

How much of the premium is used to purchase units?

Purchase of units The full amount of premium paid may not be used to buy units. The proportion used is commonly known as allocation rate and is stated in the Product Summary and / or Policy Contract. For most single premium policies and top-ups, 100% of your premium is used to purchase units. For regular premium policies, the amount of premium used will depend on whether it has a "front-end" or "back-end" loading. Front-end loading In a front-end loaded policy, most of the premiums will pay for the insurers expenses including distribution and administration costs in the early years. The remainder pays for units. Over time, the amount of premium used to buy units increases until it reaches 100%. For example, the allocation rates for a regular premium plan may be:

Policy year 1 Policy year 2 Policy year 3 Policy years 4 - 9

15% 30% 50% 100%

15% of the first years premium will be used to purchase units. In the second year, 30% will be allocated to purchase units In the third year, 50% will be allocated to purchase units. From the fourth to ninth year, the full premium will be used to buy units.

Thereafter

102%

From the tenth year onwards, 102% of the premium will buy units.

The diagram below illustrates how the allocation rate is applied to the first year premium for a regular premium ILP with front-end loading:

Payment of Premium Policyholder pays premium.

Annual premium of $1,200 is paid.

Allocation of Premium Insurer allocates a portion of the premium to purchase units in investment-linked sub-fund(s) that the policyholder selects.

Year 1 Allocation Rate: 15%. This means that $180 (15% of $1,200) is allocated to purchase units. $1,020 (85% of $1,200) goes to pay for initial expenses, which includes distribution and administration costs.

Purchasing Units Units are purchased at the Offer Price.

Offer Price: $1 Premium Allocated: $180 Number of Units Purchased: 180

Selling Units To Cover Charges Units are sold at the Bid Price to pay charges in the ILP. The Bid Price is usually lower than the Offer Price. Charges include charges for insurance protection. This depends on the amount of coverage and type of insurance protection selected.

Bid Price: $0.95 Insurance Charge: $50 Number of Units Sold to Pay Insurance Charge: 53 ($50 / $0.95) Remaining Number of Units in the ILP: 127 (180 53) Cash value of the ILP: $121 (127 units x bid price of $0.95) Note: In the above example, the number of units is rounded to nearest whole number.

Back-End Loading Under a back-end loaded policy, 100% of premiums are used to buy units from the start. Distribution and administration costs are covered by back-end charges imposed when you surrender your policy, partially or fully, within a certain period of time. Although the premium allocation structure differs for front-end and back-end loaded ILPs, the overall effect of the charges will be similar. Offer Price The offer price is the price paid to buy units. For example, if the offer price is $1 and the whole of a $1,000 premium is used to buy units, it will buy 1,000 units. Bid Price

Units are then sold at the bid price to pay for the various charges. There is typically a 5% difference between bid and offer prices. For example, if the bid price is $0.95, 1,000 units can be cashed in for $950. The cash value of the ILP depends on the number of units you have and the bid price of those units. Bid and offer prices depend on the performance of the sub-fund(s) and change on a daily basis. How are unit prices computed? Net asset value The methodology and how often unit prices are computed vary from sub-fund to sub-fund and is explained in the Product Summary and Policy Contract. Generally, the fund manager calculates the sub-funds net asset value based on a valuation of its underlying assets, after the market closes. After deducting fund management charges from the net asset value, the balance is then divided by the total number of units to derive the unit price. All ILP orders to purchase or sell units are settled based on the next computed unit price (next business days price), sometimes referred to as forward price.

Can you invest with your CPF savings?

You can use your CPF savings if the ILP is included under the CPF Investment Scheme. Since January 2001, only single premium policies have been allowed under the CPF Investment Scheme. However, CPF members who have purchased regular premium policies prior to 2001 can continue to have the regular premiums paid from their CPF savings. For more information, please refer to the CPF Board website.

Are ILPs suitable for older people?

You may not need life insurance if you do not have any dependants, e.g. your children have grown up and you and your spouse have adequate savings. If you are considering an ILP, do think about whether you can keep up with the premiums if you no longer earn an income. Also, ILPs are better suited for consumers with a longer investment horizon to ride out market fluctuations and defray initial costs which can seriously limit short term potential returns. There may be other investment options that could better suit your needs. Similarly, if insurance protection is a significant objective, but coverage is required only for a limited period, there could be other insurance options you should consider.

Keeping track of your ILP

Your insurer will send you a statement, at least once a year. This statement shows the value of units in the policy, transactions for the period and charges paid through the sale of units. Make sure you review this statement to check if the ILP and sub-fund(s) selected continue to suit your needs. Seek advice if your circumstances and what you need have changed.

The above information is prepared in collaboration with the Central Provident Fund Board and Life Insurance Association of Singapore.

Things to Watch Out for

What is the maximum you can lose? Types of risks Risk-return tradeoff Unlicensed entities

What is the maximum you can lose?

This depends on the product you are considering: Product Bank account How you might lose money Money placed in a bank account is exposed to the risk that the bank is unable to return the money to you when you want it back because of bank failure. Banks can fail and depositors can lose their savings even in reputable and well-supervised jurisdictions. If a bank fails, ordinary depositors may suffer the loss of their core savings. In Singapore, there is a deposit insurance scheme in place. For more information, visit the Singapore Deposit Insurance website.

Life insurance

A bundled investment and insurance product such as an endowment participating policy or investment-linked plan, may produce returns which underperform your expectations. There is also the risk that the insurer fails. Life insurance policies benefit from the Policy Owners Protection Fund Scheme (PPF Scheme). If an insurer fails, the PPF Scheme will cover 100% of guaranteed liabilities on all life policies, subject to caps for different types of policies. For individual life policies, the cap is S$500,000 for sum assured and S$100,000 for surrender value per life assured per insurer.

Traded products

Bonds, shares, unit trusts and ETFs have prices which move up and down. Your gain or loss depends on the price that you paid when you bought the asset, income you have received from holding the asset, and the price at which you eventually sell the asset. For bonds and shares, it may be very difficult to recover your investment if the issuer of your bonds or shares is wound up or liquidated. If you are not an accredited investor and have suffered a loss arising from your broker's fraud or insolvency, you may claim compensation from SGX provided you dealt with an SGX broker and the loss concerned an SGX listed product. SGX maintains a fund called the Fidelity Fund to

meet such claims for compensation. There is a $50,000 limit on each claim. But do note that not all brokers are SGX members.

Structured products

Structured products such as structured deposits, structured notes and ETFs are complex products. They often contain derivatives and involve multiple parties. Different factors can cause you a loss. A default by the bank holding your structured deposit, or the issuer of your structured note, or the counterparty to a derivative embedded inside your investment, may cause you to lose all the money you invested. The return on a structured product is usually linked to the performance of an underlying reference asset, for example the Straits Times Index. So if the underlying asset underperforms, you may end up with a loss.

Options and warrants

Options and warrants have expiry dates. If you fail to exercise the option or warrant or fail to sell it before expiry, you may lose the money you invested.

Using leverage

If you trade a product using leverage or margin finance, you may lose more than your initial investment amount if markets move against you before you are able to close out your position.

Foreign listed products risks Foreign listed products expose you to additional potential risks due to legal and regulatory differences between the foreign regime and the local regime. For example, there may be differing disclosure standards and investor protection. Foreign exchange risk and tax liabilities may also be present. You should be aware that political, economic and social factors in the foreign country may influence the domestic market and impact the value of the investment. The extent of risks will also differ depending on the jurisdiction in which the foreign product is listed. Make sure you are familiar with the different risks and that you are prepared to undertake those risks before investing.

Remember to select a product that suits your risk profile. Find out what can happen in the worst case and ask yourself if you can withstand this loss. Find out more about your risk profile in building and managing your portfolio. Do make sure you understand all the information you are provided. Depending on the product you buy, such information will be contained in documents such as the product highlights sheet, key terms sheet, prospectus, benefit illustration and product summary.

Types of risks
There are risks that affect investments generally, for example, overall economic conditions, political stability, changes in interest rates or the availability of credit, all of which can affect market and general business conditions. There are also risks which may apply more specifically to a particular investment. For example, if a company loses dominance in a key market, is hit by a scandal over defective products or there are concerns about its poor management, its share price may plunge. You can reduce these risks if you spread your money over different

investments, e.g. different products like bonds and shares and different economic sectors or regions. Do read the product documentation to understand the different risks, especially for complex products like structured notes or products which are bought using leverage.

Risk-return tradeoff
Investments that offer the potential for higher expected returns come with higher risk of loss for the investor. This is called the risk-return tradeoff. When you invest in a product offering higher potential returns, the tradeoff is that you are exposed to a higher risk of losing some or all of the money invested. If you are uncomfortable with the risk of losing money, you must be prepared to invest in less risky products which will earn lower returns. Before you invest your money, ask yourself how much you can lose in the worst case scenario and whether you can afford this.

Unlicensed Entities
Many products and schemes, in Singapore and elsewhere, purport to offer consumers high potential profits or fast returns, perhaps at low or no risk. Not all entities or individuals offering investment returns are regulated by MAS. MAS strongly encourages consumers seeking financial services to deal with regulated persons. Read our Consumer Alerts to find out more.

The above information is prepared in collaboration with the Association of Banks in Singapore, Investment Management Association of Singapore and Securities Investors Association (Singapore).

Who are You Dealing With

What is the transaction or sales process? Who am I dealing with?
Before you invest in a product , make sure you know who you are dealing with. MAS regulatory regime aims at safeguarding your interests by ensuring that only competent and professional persons provide financial services. If you choose to deal with persons that are not regulated by MAS, you forgo the protection afforded under laws administered by MAS, particularly if these persons are based overseas. Who are you dealing with? Check if the party you are dealing with is authorised by MAS. Financial institution Look up the Financial Institutions Directory on the Monetary Authority of Singapore (MAS)s website to see if the entity you intend to deal with is regulated in Singapore, and the specific regulated activities it is authorised to conduct in Singapore. MAS only regulates entities with a presence in Singapore. Is the individual you are dealing with authorised? Find out more about the individual representing the financial institution you are dealing with. If he is authorised to deal in or provide advice on life insurance and investment products, he will have been assigned a unique representative number. You should request for your representative's unique number and conduct your own check on the MAS Register of Representatives. Use the Register to verify whether the person is an appointed representative, the regulated activities which the representative is allowed to conduct, the financial institution the representative acts for and if there are any suspensions, revocations and prohibition orders issued against the representative by MAS. Do financial institutions and their representatives offer products from one or several product providers? Product providers are entities that manufacture or issue financial products. Examples include asset management companies and life insurance companies. Some financial institutions only offer products from a single product provider, while some have tie-ups with more than one product provider to offer customers more choices. You may wish to find out from your representative the range of products offered at the start of your relationship with the financial institution.

What if I want advice - who can give me advice on investment products?

MAS regulates the following types of firms or persons who can give advice on investment products to consumers: Licensed financial advisers (Licensed FAs)

These companies are required to hold a financial advisers (FA) licence before they may conduct regulated activities governed under the Financial Advisers Act (FAA). A financial adviser may only conduct activities for which it is licensed in. Exempted financial advisers (Exempt FAs) Banks, merchant banks, finance companies, insurance companies, insurance brokers, and holders of a capital markets service licence, i.e. brokerage firms, which are Exempt FAs are authorised to provide advice. These entities are exempted from holding an FA licence because MAS already regulates them under separate legislation. They must meet similar business conduct rules under the FAA as licensed FAs. Not all brokerage firms are Exempt FAs. Those which are not Exempt FAs are not authorised to provide advice and can provide an execution-only service. You will need to seek your own advice from another FA if you wish to deal with these entities. Consumers are encouraged to check with the financial institution on the scope of services before deciding to deal with them. There are also brokerage firms that make the business decision to provide an execution-only service and do not offer advisory services although they are authorised to do so. Financial adviser (FA) representatives These are individuals who are employees or agents appointed by licensed FAs or exempt FAs to provide financial advice on investment products to consumers on their behalf. These would include remisiers where they are also appointed as financial adviser representatives.

What happens during the transaction/sales process? What documents will I receive?
This depends on whether you merely instruct the financial institution to carry out a transaction (e.g. to buy or sell a product) or you want to receive advice from a financial institution. Instructing a financial institution to carry out transaction /Execution-only transaction This is commonly known as execution-only if you are trading and/or your trading account has been approved to trade Specified Investment Products. The financial institution will carry out the transaction based on your instructions. It is not required to advise if the product is suitable for you. Do note that in such situations, you will be solely responsible for ensuring that the product is suitable for you. The financial institution is not required to provide verbal and written information on the product. Transactions where advice/recommendation is provided If you wish to receive advice on an investment product, you will need to deal with a financial institution and individuals authorised under the FAA. They must disclose product information clearly when they recommend investment products to you. They must have a reasonable basis for any recommendation made, taking into consideration your financial situation, particular needs, investment objectives, and knowledge and experience in the product, where relevant. To understand your needs, the financial adviser representative should go through a "Know-Your-Client" (KYC) process. The KYC process will help your financial adviser representative understand: Example

your investment objectives

Are you accumulating funds for your retirement or for your children's education?

your financial situation and personal needs

Do you have many dependents? Are you likely to need access to cash for example to pay for medical treatment?

your source of income, whether this is stable or irregular, and also your risk profile

Do you earn a salary or is your income largely dependent on commissions? If you suffer an investment loss, will this damage your ability to service your debt commitments or meet your financial goals?

how much you can afford to invest after meeting your current commitments and liabilities

What liabilities do you have, say home loan payments or insurance premiums?

other products you have (to see if product offered will complement or supplement what you have or over expose you to certain risks or leave you over-insured)

Other products include other investments or insurance products owned.

The financial adviser representative must explain why the investment products recommended are suitable for you. He must also explain the features of the products as well as the costs and charges involved. Your financial adviser representative must also provide you with the following document: Financial Needs Analysis This contains information you shared with your financial adviser representative for him to identify your financial goals / investment objectives and financial situation including risk preference and affordability. The document will also state the recommended product and the basis for this recommendation. You should discuss this basis with your financial adviser representative and assess if the recommended plan meets your needs. Make sure that the information is accurately captured and that you agree with the risk profile indicated. Make sure you understand the terms used to describe risk profile and that the description reflects the level of risk you are prepared to withstand. What if you disagree with recommendation or fact-find documentation? If you dont think the documents present an accurate picture, e.g. if you are more uncomfortable with the risks and losing money than indicated in the documents, then do clarify with your financial adviser representative and ask for corrections. Always ask for the clarifications in writing. If you disagree with your financial adviser representatives recommendation, make sure you clarify your needs. Do ask about other products.

Specified Investment Products Some financial products are classified as Specified Investment Products (SIPs), for example exchange traded funds, investment-linked plans, structured notes and contracts for differences*. Do check with your financial institution whether the product you are considering is an SIP. Consumers should be aware that SIPs contain features that can be more difficult to understand. You should ensure that you understand the key risks and features of such products before investing in them. Financial

institutions are required to assess whether you have the relevant knowledge or experience to understand the risks and features of SIPs before selling them to you. The process is known as the Customer Account Review (CAR) if you wish to open an account to trade SIPs listed on an exchange, and the Customer Knowledge Assessment if you wish to transact or invest in an SIP that is not listed on an exchange. The financial institutions will inform you if you are assessed not to possess the relevant knowledge or experience. If you still intend to proceed with the transaction, the financial institution must provide advice to you. Only financial institutions that are authorised to provide advice may do so. Certain safeguards will also apply. Read the Consumer Guide on SIPs. *With effect from October 2012, some products currently classified as SIPs will not be considered as SIPs provided they meet certain requirements.

Product information Financial institutions are required to disclose the features, risks and costs of investment products to you. Here are the key documents you must receive depending on the product you buy: Product Product Summary & Benefit Illustration Yes Yes No No No No No Product Highlights Sheet Prospectus Key Terms Sheet

Life insurance (non-investmentlinked plan) Investment-linked plan Unit trust Structured notes Exchange traded funds Structured warrants Bonds

No Yes Yes Yes Yes No No

No No Yes Yes Yes No Yes

No No No No No Yes Yes

Please note that the requirement to provide a prospectus, product summary and benefit illustration and product highlights sheet only applies to financial advisers when providing a recommendation on a collective investment scheme (e.g. fund, unit trust or ETF), debentures or investment linked plans. While issuers are required to issue Key Terms Sheet, MAS does not require brokers or financial advisers to provide these when dealing with or advising consumer on structured warrants or bonds. Tips: 1. Do not rush through the process. Take time to understand the product and make sure it meets your needs before you finalise your decision. Read all documents and forms, which may include some of the following: prospectus / product summary / product highlights sheet / key terms sheet and terms and conditions, before you sign anything. Never sign blank forms. Ask if there is any free-look period. Life insurance policies have a 14 day free look period and unit trusts have a 7 day free look period. Remember there may be cost and/or

investment losses if you change your mind about purchasing the product, or decide to sell it or switch to another product prematurely. 2. Do note that if you purchase an investment product on your own (i.e. without receiving advice or recommendation from a financial adviser representative) or against the recommendation of a financial adviser representative, it is your responsibility to ensure that you have a full understanding of the product and that the product is suitable for you.