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Thursday, January 25, 2007

What do unit trust and a RM10 restaurant have in common?

Recently I attend a Robert Young seminar, a speaker from Singapore. He makes a simple analogy to describe the concept of a unit trust.

There is this restaurant that sells each dish for RM10. You only have RM10. So when you go by yourself, you only can buy one dish. You may get the dish that is tasty or to your liking and you may not. But as you don’t have any more money, you have to eat it regardless.

But then if you take 9 of you friends who also have only RM10 each. You can buy 10 different dishes that can be shared. From the 10 dishes, you may like all or you may not. You can eat what you like and not what you don’t like.

This is the same with unit trust, where you can own 10 or more blue chip company equities with a small amount usually RM1,000. If you try to enter the share market on you own, you usually can afford to buy only one blue chip company. If the share price go up you are in heaven, if the price go down you are in hot water.

In unit trust the loss from shares that go down will be balanced by the gain from other shares that went up.

So guys, it looks like varieties do make it tastier and safer for all.

Thursday, January 18, 2007

Balancing Needs & Risks in Unit Trust Investment

Investors who are not far from retirement are a cautious group, and with good reason too. They know they need to carefully balance their investment weightings of stocks and bonds to keep their nest egg growing – but without too much risk. That’s where balanced funds come in. Balanced funds are funds that invest in a diversified portfolio of common stock, preferred stocks, bonds and sort-term bonds, to provide both income and capital growth while avoiding excessive risks.

For the balanced funds, the ratio of stocks to bonds is determined by the fund’s objective and the fund manager. On the average, their ratio of stocks to other investments is approximately 60:40. Managers of balanced funds can, however, shift ratio one way or the other to take advantage of high interest rates or stock market growth. These funds may be equity-oriented and skewed toward stocks, or income-oriented and skewed toward bonds. For Full Article Click Here

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Tuesday, January 16, 2007

Letter to a cousin......

Assalamualaikum,

I hope you are in great health. You mentioned that you are interested in investing in the unit trust for your children education fund.

You also mentioned that you do your savings at Lembaga Tabung Haji(LTH). I would like to suggest that you open two unit trust accounts. One for your children education fund, and another to maximized the return that you get from your LTH savings. Considering LTH did not give a high dividend, merely around 4.5%. The latest I heard, our inflation rate stand at 3.6% per year. With the dividend that you get from LTH you merely gain a value of 0.9% to your money.

So it is a waste if you keep a large amount of money in your LTH account. I suggest that you save only the amount that equal to your three months cost of living in LTH. This is your emergency fund or short term investment. The rest should be invested in a higher-yield investment. When you are ready to go for your Haj, you can transfer back the amount for your Haj back into the LTH savings. When you invest in the unit trust you can gain more than 10% a year. Below is a table to show you the difference of return that you can get when your initial investment is RM10,000 and additional investment is RM100 per month.


Year

Lembaga Tabung Haji

Unit Trust Fund

5

RM 19,186.00

RM 23,822.00

10

RM 30,633.00

RM 46,083.00

15

RM 44,898.00

RM 81,935.00

20

RM 62,674.00

RM 139,674.00


Going back to inflation, inflation also will increase the three years local university cost for your first born who is 3 years old from the current RM40,500 (local university fees including living cost) to RM 68,842.00 when he is 18 years old. For your second child who is 2 years old, it will be RM71,320.00.

Now days, it is hard to get any scholarship or education loan. In the future PTPTN may also be abolished as there are a lot of students who did not pay the loan after finishing their study. So it is important that you start a monthly saving for your children tertiary education. With a return rate of 10% a year you should put aside RM172 per month for your first born and RM 157.00 for your second child. As you can see here, the earlier you start the lesser amount that you have to set aside.

It is okay if you cannot afford to save the total of RM329 per month immediately, what is important is to start saving any amount that you can afford now. Who knows, you may get a big raise or receive an unexpected windfall in the future. Then you can top up your children fund investment.

So, good luck with your education fund savings and I hope all your dream and financial goals will be achieved.

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Wednesday, January 10, 2007

Is Your Retirement Fund Enough?

Did you know? Most Employees Provident Fund (EPF) savings will be finished after 3 years of retirement. Below is a table showing an estimate amount of EPF savings.

Category of workers*

Total savings at 55 years (MYR)

A

224,400

B

374,112

C

488,474

D

503,446

E

604,135

A - Factory worker that starts contributing at the age of 18 with starting salary of RM600 a month.

B - Factory worker that starts contributing at the age of 18 with starting salary of RM1000 a month.

C - Graduate that starts contributing at the age of 23 with starting salary of RM1500 a month.

D - Graduate with Master Degree that starts contributing at the age of 25 with starting salary of RM2500 a month.

E - Professionals that starts contributing at the age of 25 with starting salary of RM3000 a month.

Assumption : Contribution rate- 23 percent; Dividend Rate- 5 percent; Salary raise rate- 3 percent a year; Member contribute until 55 years old; Account is fully withdrawn.

Source: Financing challenges facing social security schemes: The experience of the Employees Provident Fund of Malaysia, Rusma Ibrahim, ms. 9

For a male factory worker B, if his living cost is RM800 per month then when he is 55 years old it will be RM 3,414.47 a month because of the Malaysian 4% a year inflation rate. So if you have RM374,112 at the age of 55 years old (already retired) and invest all the money back to get return rate of 8% a year, the money will be spend totally by the age of 66 years old when your living cost is RM 3,414.47 a month . But according to statistic Malaysian man lifespan is 70.4 years. So you will have 4 more years without money. This illustrate that EPF money is not enough to support your live after retirement.

So, additional saving other than EPF is very important for your golden years. Like Malay old folks saying, "To make ready the umbrella before the rain start". If we save a lot consistently while we are still strong to work, we don't have to work during our retirement years. We can concentrate on doing what we love and for Muslim, have more time for prayer and amassing good deeds.

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Sunday, January 7, 2007

The Four Distinct Phases of Financial Planning

Phase One: The Foundation Years (Mid-20s to Mid-30s)
  • Many years of earning power ahead
  • Plans to buy a home and start a family
  • Willing to accept some fluctuations in investment, result in pursuit of long-term financials goals

Phase Two: The Acquisition Years (Mid-30s to Mid-40s)

  • Income still climbing
  • Establishes a tertiary education fund for children
  • Willing to accept some fluctuations in investment, result in pursuit of long-term financials goals

Phase Three: The Accumulation Years (Mid-40s to Mid-50s)

  • Family responsibilities are winding down
  • Begins to think of retirement
  • Seeks less vilatility in investment results by emphasising more income and capital preservation and less long-term growth

Phase Four: The Reaping-The-Reward Years (Mid-50s to Late Retirement)

  • Retired or about to retire
  • Years of earning high income may be over
  • Plans retirement activities; and assesses ability to set up trust funds for grandchildren
  • Seeks lower volatility in investment results

So where are you at right now?

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Tuesday, January 2, 2007

New Year Resolution!

Happy New Year to everyone! Every new year there always new resolution made. Why not this year make it "I want to save more and spend less". I'm sure everyone of you have been thinking about it but doesn't have the courage to leave your credit card behind, pass the temptation of adding another branded items in your list of must-have-coz-everyone-will-look-with-envy-at-me collections.

Well if you are serious about starting the year with a good money management, you can start by purchasing "Buku Perancangan dan Penyata Kewangan Keluarga 2007" or
"Household Planning and Account Book 2007" release by Bank Negara Malaysia. It will help you in preparing budget and managing your household income, expenses, savings and investments. The book includes a section that features the concept of "Life and Financial Planning" for a family. It is aimed at providing greater knowledge and awareness in budgeting and financial management.

You can purchase the book at the Bank Negara Malaysia Money Museum, Kuala Lumpur; Bank Negara Malaysia branches in Penang, Johor Bahru, Kuala Terengganu, Kuching and Kota Kinabalu; MPH Bookstores and other selected book stores from today.

It only cost RM1.50.

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