ISAs see modest early success

Five months have passed since Korean banks introduced the individual savings account (ISA), and so far, they have been modestly profitable, generating average returns of 1.07 percent.

An ISA is an integrated management account that allows customers to manage investments in multiple financial products such as funds and even derivative-linked securities.

Meritz Securities’ high-yield Type B ISA had the highest returns, far exceeding the average with a whopping 5.11 percent in the last five months.

Conversely, Shinhan Bank’s trust-type Model Portfolio ISA, which is high-risk and high-return, reported the worst performance, with a profit loss of 1.46 percent.

Experts say the best way to choose an ISA is to look at the risk level, which varies depending on the type of financial products in the portfolio. The accounts can be grouped into five different risk levels from extremely high to extremely low.

High-risk ISAs invest in equity funds, derivatives and real estate investment trusts, while those with low risk invest in bond funds, deposits and repurchase agreement bonds that guarantee minimized losses.

Extremely high-risk ISAs enjoyed the highest average rate of return, at 1.1 percent, followed by high-risk ISAs with 1.03 percent returns, low-risk ISAs with 0.99 percent, medium-risk ISAs with 0.93 percent and extremely low-risk ISAs with 0.92 percent.

But even accounts of similar risk can employ different investment strategies. While some ISAs invest all 100 percent of the principal investment into a single financial product, others, even some categorized as extremely risky, also put some portion into safer areas like deposits or repurchase agreement bonds.

Meritz’s high-yield Type B ISA, for example, is considered to be in the highest risk level, but 51.8 percent goes into domestic and overseas balanced funds while the other 48.2 percent is invested in overseas equity funds.

The company’s Growth Type B ISA also has a mixed portfolio, and even though 30 percent is invested in money market funds, considered relatively safe, the ISA is categorized as high-risk because the other 70 percent is invested in riskier financial products.

HMC Investment Securities’ Profit Type B2 ISA invests 100 percent in equity and balanced funds in emerging markets, and that has led it to generate the second-highest return rate so far this year.

“In the case of ISAs, even when they are in the same risk category, the portfolio can differ with each financial institution depending on the client’s credit score and fundamental assets,” said an official at the Korea Financial Investment Association.

“If you want to easily adjust your investment portfolio, it would be best to subscribe to ISAs with substantial investment in exchange-traded funds,” said Moon Hyung-soo, a senior researcher at the Industrial Bank of Korea’s wealth management department, “while if you’re aiming for high returns even with high risk, it would be best to subscribe to ISAs with a wide variety of investments.”

It is too early, though, to gauge the success of ISAs from just five months of returns. That’s because the most important factor in ISAs is the long-term return rate. The government incentivizes long-term subscriptions to ISAs by offering tax benefits to clients who hold an account for three to five years.

“As an ISA is a mid- to long-term investment product, the current short-term profit rate has no significant meaning,” said Hwang Se-woon, an official at the Korea Capital Market Institute. “It would be best to only use the profit rate as a guide to choosing promising products.”

Other experts say the important element of managing one’s ISA is adjusting the investment portfolio.

“Although how the initial portfolio is set up is important in the early stage, the clients have to closely monitor how the portfolio will be changed quarterly with a long-term perspective in mind,” said Chang Hwa-tak, an analyst at Dongbu Securities.

Market experts say clients subscribing to an ISA need to also closely follow up on additional costs such as management commission, as it could affect the actual profit rates three to five years later.

BY LEE SEUNG-HO [lee.hojeong@joongang.co.kr]