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Should You Invest In A Guaranteed Return Scheme?

MoneyThe Guaranteed Return Scheme (GRS) has been making a reappearance in Malaysia lately. This can be in the form of a rental guarantee i.e. Guaranteed Rental Return (GRR) or a straight guaranteed return from the investment i.e. Capital Guaranteed Fund (CGF).

Firstly, you should know that the GRS is a marketing strategy used by developers and/or institutions to help them sell the product. They hope that the GRS will sweeten the offer, make the investment more attractive and hopefully sway the investors their way. It is a perfectly legitimate way of marketing a product.

From the investors’ perspective, GRS appear to be a good deal. They know of their return upfront and gain confidence from the guarantee given by the issuer. So there appear to be little risk as everything is on paper.

There are a couple of issues with GRS though. The first is the low return offered by the scheme, which usually ranges between 2 to 6 percent. These returns will not light up anyone’s world. By the way, such return is to be expected as that is about all the issuer can guarantee. To do otherwise i.e. guaranteeing double digit returns is the equivalent of putting their heads on the chopping block. No sane person or company will be willing to do that.

The second and the bigger danger is from the counterparty risk. What that means in English is that there is a chance that the issuer cannot or may not fulfil the guarantee. In other words, they may not pay the money as promised.

“But they have signed the guarantee in black and white!” This is often the retort that I get after explaining the above.

Dear readers, at the end of the day, a guarantee is only as good as the person or the person giving the guarantee. Let me repeat that so that you will remember it: at the end of the day, a guarantee is only as good as the person or the person giving the guarantee.

If the person is a snake, you can have ten guarantees and it will not make a difference – he is not going to pay you your dues. Sure, you have it all in black and white but what good is a piece of paper to a snake? What are you going to do if he says he doesn’t have any money to pay you? What good is the guarantee if the company shuts down? The last resort would be going to court but any time the word ‘court’ comes onto the discussion, you have already lost.

In case you think this is theoretical, I can mention that there are at least a couple of GRR projects in Malaysia that has gone sour for the investors. I’m sure that there are similar tragic stories in other countries as well, including the US. The investors bought into the project largely because of the GRR. Unfortunately, they have not been paid the rental for many months already. When they complained, the project manager said that they don’t have enough money to pay all the investors as the take-up rate is not as good as it should be. Some of the investors are thinking of going to court; you know the answer to this already! Worse, the investors cannot even sell the units as no one wants to take over a problem! In other words, they are stuck in no-investor’s land!

Of course, this is not to say that all GRR are bad. There are obviously many good ones. The point is that you should consider a lot of things including the background of the party giving the guarantee and their track record instead of focusing on the GRS before investing your money.

Do you have any experience in GRS?

 

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