管氏企业

Question:
I currently have about RM 120,000 in my Fixed Deposit (FD), which only provides me a 3.8% annual return. Can you suggest any other safe methods of growing it faster? As you know, our inflation rate is about 6% per year, which means my money is at a losing rate of 2.2% (6% to 3.8%) if I keep it in FD.

Answer:
Congratulations on realising that placing your hard-earned savings in FD is not as safe as many people think. You are absolutely right when you said you are indeed losing 2.2% after taking into account your inflation rate of 6%. In fact, playing it safe is not “safe” at all as your money cannot grow fast enough to outpace inflation.

From our many years of experience in helping investors achieve their financial goals, we have concluded that investors want a reasonable personal rate of return, within an acceptable level of risk. Therefore it is important to understand that investment returns are always a function of investment risk.

Generally speaking, the higher the sought after investment returns are, the higher the associated risks. Therefore you must prepared to take risks, with a view of investing in the long term (at least three years), in order to invest successfully.

The next step is to explore the investment options available to you such as property, stocks and unit trusts. Investing directly in stock market is great if we have the time, skill and money required. Since most of us do not have the time or skill to invest directly in the stock market, unit trusts could be the
best answer for us.

According to well known investment author and fund manager Peter Lynch, “The Mutual Fund (unit trust) is a wonderful invention for people who have neither the time nor the inclination to test their wits against the stock market, as well as for people with small amounts of time to invest who seek diversification.”

Before investing, you should understand the various asset classes of unit trust fund. There are three broad asset classes based on risk. The highest risk is associated with Equity class. Second is the Bond Class. The third and lowest is the Money Market Class.

The most basic question you must ask yourself when you decide to buy a particular unit trust is: Is it an Equity, Bond or Money Market Fund?

Each of us is in different financial circumstances. Therefore, it is very important that you meet with a qualified Financial Planner to undergo a detailed and systematic process of analysing your investment objectives, risk profile and investment time horizon.

Without going through a systematic process, it is difficult to design the most appropriate unit trust portfolio that matches your unique risk profile and investment needs.

There are four major ways to start investing in unit trusts:

Lump Sum Purchases
This is where an investor has a lump sum to invest into a unit trust. This may be the only investment the investor wishes to make. Over a period of time (3-20 years), the initial investment will increase as distribution and other income is earned by the fund. When redemption or sale of the units takes place, the unit-selling price will reflect the accumulation and compounding of capital over the relevant periods. It is this compounding effect over time which makes accumulation type investments, such as unit trusts, so attractive to the investor.

For example, someone who has recently inherited a sum of money may wish to invest the funds into a unit trust and hold it for an extended period to save for some specific purpose. E.g. children’s education. At the end of the holding period, the proceeds of the sale of the units will be the initial
investment plus the returns on that amount, accumulated over the period.

Regular Savings
Some people invest in unit trusts by making regular (e.g. monthly) contributions to their fund. This is an ideal, disciplined and useful way to accumulate capital for a future need. By making regular contributions over a period of time, the sum accumulated at the end of the period will increase. This is commonly known as dollar cost averaging. At the end of the period, the redemption (or sale) price of the units held will represent the
accumulation of all contributions, plus returns generated from the total contributions since the first purchase was made. The effect is more noticeable the longer the holding and contribution period. This form of savings is the basis of most pension fund accumulation e.g. the Employees Provident
Fund.

EPF Transfers
Investors may also invest in unit trust funds through transfers of eligible amounts from his EPF account. EPF members who have savings of at least RM55,000 in account 1, are eligible to withdraw from their EPF savings to invest in unit trusts.

Borrowing
Although an investor may obtain a loan from a financial institution for the purpose of investing in unit trust funds, investors should seek appropriate advice as there are additional risks involved when using borrowings to finance an investment in unit trust funds.

For an individual to maintain his own portfolio of investments, he needs to keep up to date with market information and sentiments. In today’s sophisticated financial markets, this means having to embrace a wide range of information from a plethora of sources. For many individual investors, this is difficult, if not impossible and at times, very frustrating as they attempt to “keep on top “of the information pile.

Investing in unit trusts transfers most of the necessary ‘know-how’ of investing to those best equipped to handle it – the professional fund managers. There are a number of other substantial benefits of investing in unit trusts that should be noted.

Affordability
Unit trusts are very affordable. Investors can start with an investment amount as low as RM100.

Diversification
Rather than concentrating an investment portfolio of one or two investments or shares, a portfolio of market securities can be held. The wider the spread of investments, the less volatile (i.e. variable) the investment returns will be. In simple terms, investment into unit trusts means diversification of risk: “not putting all your eggs in one basket.”

Liquidity
Most investors prefer that their investment to be liquid. That is, they can easily buy and sell without difficulties. Unit trusts provide this benefit, easily bought and sold. An excellent return that cannot be “cashed-in” (i.e. sold) does not necessarily mean a good investment as poor liquidity constitutes
an additional risk factor for the investor.

Professional Fund Management
The people managing unit trusts are approved professionals. Their training and background ensures that decision making is structured and according to sound investment principles. In the process, unit trust funds enjoy the depth of knowledge and experience that fund manager can bring. In the long term, it is this expertise that should generate above average investment returns for unit trust investors.

Investment Exposure
For the individual investor, it is sometimes difficult to gain exposure to a particular asset class. For instance, if an investor with RM5,000 wants to gain exposure to the Malaysian property market, global equity markets and the Malaysian bond market, it would be impossible to simultaneously
hold a direct investment portfolio in all of these markets. With unit trust investments, it is possible to spread your money around to all of these asset classes at the same time, so that the investor can gain the investment exposure he requires.

Wholesale Investment Costs & Access to Other Asset Classes
When making direct investments in the Bursa Malaysia, the investor faces costs and charges that are much higher. With unit trust the economics of the transaction are more favourable i.e. the fees and charges/brokerage etc. per investment ringgit are likely to be less. Because fund managers invest in larger amounts, they are able to get access to wholesale yields and products which are impossible for the individual investor to obtain. For instance, unlike unit trust funds, most individual investors cannot have direct access to the Malaysian Government Security market because, amongst other reasons, the amount of each transaction could run into millions of Ringgit.

The Comfort of Regulation
With the introduction of unit trusts in Malaysia came regulation from various regulators, especially the Securities Commission. The entire range of variables relating to the unit trust industry is governed by various legislations. The sole purpose of such regulations is to protect the interest of the investing public. Regulations provide investors with a level of comfort that they are investing in a safe investment
mechanism.

Unit Trusts are a form of collective investment that allows investors with similar investment objectives to pool their funds to be invested in a portfolio of securities or other assets.

A professional fund manager then invests the pooled funds in a portfolio which may include the asset classes listed below:

Unit holders do not purchase the securities in the portfolio directly. Ownership of the fund is divided into units of entitlement. As the fund increases or decreases in value, the value of each unit increases or decreases accordingly. The number of units held depends on the unit purchase price at the time of investment and the amount of money invested.

The return on investment of unit holders is usually in the form of income distribution and capital appreciation, derived from the pool of assets supporting the unit trust fund. Each unit earns an equal return, determined by the level of distribution and/or capital appreciation in any one period.

Unit trust investors are typically those with savings to invest, who neither have the time nor the inclination to hold portfolios of direct investments or shares. Rather, they prefer to invest in a secure, reputable investment vehicle which suits their purposes. Unit trusts allow investors to have easy access to a wide range of investment exposures not normally available to them.

As investors seek to maximise returns on their financial resources, unit trusts provide an ideal way for them to gain exposure to investments that, in the long run, should produce returns superior to cash savings and fixed deposit investments.

The cost of these potentially higher returns is of course the risk that accompanies the investment. In the short run, the certainty of investment returns of most unit trust products is less than those offered by fixed deposits. However, in the medium to long term (i.e. 3-20 years), unit trust investments generally provide superior returns at acceptable levels of risk.