Risks are part of any investment activity and should never be taken lightly.
Now that you are fluent with the big picture of PRS and know exactly how to calculate the returns, here are 3 major risk factors you should think about before signing up for a PRS plan.
1) High Risk, High Return
The golden rule of investment is that when you choose a product that aims for high returns, you are exposing yourself to the risk of not seeing profitable returns (or perhaps even losing money), particularly in the short term.
When it comes to PRS, you may wish to consider your approach depending on the stage of life you’re in. As an example: the closer to retirement you are, the more you may be inclined to invest in a PRS plan that is less aggressive; because you simply cannot afford to risk your retirement money when you have less time to recuperate it in the event of losses.
On the other hand, if you have an envisaged financial goal and know you are a long way from your target due to factors such as the cost of living, inflation and savings / fixed deposit rates; you may opt for a higher-risk PRS plan because you expect the returns from your PRS to be much higher over the long run.
Because different people have different risk tolerance levels, no one can tell you how you should invest in your PRS. Ultimately, the decision lies with you; and with it, so does the consequence.
2) As of All Investment, Returns Are Not Guaranteed
Like any other investments in the market, the gains of PRS are not guaranteed. Though all PRS plans are set out to reap maximum returns based on their investment criteria, there is no stopping the Net Value Asset of a PRS plan from plunging (or sky-rocketing) due to market conditions.
So, despite the best efforts of PRS providers and regulators to safeguard your interest, you should always consider the possibility of not reaping any returns from your hard-earned cash… and what those implications are.
3) Capitals Are Not Protected Too
As a continuation from Point (2), not only are returns for your PRS account not guaranteed, the contributions that you’ve made to a PRS plan are not protected too. To put it simply, this means there is always that minute chance that you’d lose the money you’ve been contributing all those years in the event of adverse market conditions.
Having highlighted these risks, we hope we haven’t scared you off from PRS. These risks are part of any investment activity and though they should never be taken lightly; you can always mitigate these risks by educating yourself and tracking your PRS plans carefully. As long as you keep a close eye on the unit prices of the PRS plans you’ve invested in, you will always be ready to make timely decisions and minimise your losses in the worst case scenario.
Moreover, there are obviously immense benefits to signing up for a PRS plan, which we will cover in the next and final part of this series.
However, if you think fixed deposit is the way to go in your financial planning; click on to our fixed deposit comparison table to see which bank provides the best interest rate right now!
