It is unsurprising that Kevin Rudd’s plan to guarantee certain deposits is creating interesting problems for some organisations in the market. Take for instance organisations with billions of dollars under management that were not given the government guarantee. In the open market there is a trade off between risk and return so if an organisation offers an interest bearing security which is more risky perhaps due to the underlying strength of their organisation then they would have to offer more interest in order to secure a portion of the market. A rational investor would require greater return if they are taking on extra risk. Now if the government is removing the credit risk from some organisations but not others the market will obviously be attracted to those organisations without the credit risk. The government has entered into the market place effectively introducing new unexpected rules. In general this is referred to as political risk for those organisations. As a result some mortgage lenders have frozen redemptions because the equilibrium has changed in the market place.
A managed investment dealing in mortgages basically borrows money from the market and uses it to on lend it to other organisations (or individuals) to finance buildings for example shopping centres. If funds are redeemed (repaid to lenders) caused because they don’t get a guarantee, the funds will be drained from the mortgage fund and they won’t be able to sustain the finance for their clients which is the fundamentals of their business. Mortgage funds have a longer term time scale than other monetary assets because of the nature of their business. Often these funds have redemption charges as a disincentive for investors to move in and out of the fund quickly. Under normal circumstances this is satisfactory. In the circumstance created by the government’s new policy some mortgage funds are finding many redemption claims which showed that the normal disincentive were not sufficient. If the mortgage fund did not react by putting a freeze on redemptions then they would lose their ability to finance the organisations. Now the investors are locked into the fund which brings further problems for the funds as people will now be even more disinclined towards investing into the fund as they realises they would loose their flexibility and liquidity so it is less likely that new investors will invest.
The concepts discussed above with relation to this new set of events are all contained in the Diploma of Financial Services (Financial Planning) if the course is RG146/PS146 compliant. These are the courses financial advisers need to undertake if they want to give advice to clients. The issues contained in this article include those dealing with managed investments which is one of the RG146/PS146 courses (Provide advice in managed investments). RG146/PS146 courses are sometimes referred to as RG146/PS146 training which is needed to become RG146 or PS146 compliant. Other RG146/PS146 courses include Provide advice in superannuation, Provide advice in life insurance, Provide advice in financial planning, Provide advice in derivatives, Provide advice in insurance broking, and Provide advice in securities.