Tuesday, 22 January 2013

Investing In Amanah Saham via Personal Loan, should you or should you not?

I've had a discussion with a friend of mine on whether to take up a personal loan to invest into Amanah Saham Bumiputera (ASB). I was curious to find out how much the returns would be for this friend of mine if he takes up a personal loan to fund his ASB investment. We also discussed a few scenarios of investing and tried to calculate what is the actual value of investment after 20 years.

We came up with a few scenarios such as:
1. Taking up a RM100,000 personal loan and servicing the loan with his own cash while the RM100,000 is invested into ASB. Annual dividend from ASB is also reinvested.

2. Taking up a RM100,000 personal loan and utilizing the annual dividend from ASB to pay off the personal loan. Whatever balance from the dividend after paying of the personal loan is reinvested into ASB.

3. Not to take up a personal loan, instead using his own cash to invest monthly into ASB. The amount to invest is equivalent to the amount to be paid monthly for a personal loan.

4. Not to take up a personal loan, instead using his own cash to invest monthly into Fixed Deposit. The amount to invest is equivalent to the amount to be paid monthly for a personal loan.

5. Not to take up a personal loan, instead using his own cash to invest monthly into Unit Trust. The amount to invest is equivalent to the amount to be paid monthly for a personal loan.

Next, we managed to find the personal loan details from Maybank as shown below:
Personal Loan Details:
Loan Amount : RM100,000
Tenure of Loan : 20 years
Interest Rate for Loan : BLR - 1.65% 
Monthly Payment* : RM658/month
*Monthly payment value obtained from Maybank ASB Monthly Loan Table (updated 12/05/2011)
Financial Freedom after taking up a personal loan?? Hmmmm

Some assumptions on the investment returns (annual % returns) have to be made to ease the calculation process:
Expected Annual % Returns:
1. ASB Average Dividend Payout : 8%
(note that this is only the Dividend Payout, Bonus of ASB which is calculated based on the 10 year minimum monthly balance is not taken into consideration for this calculation)
2. Fixed Deposit : 3.5%
3. Unit Trust - Equity Based : 10%

Results from our calculation:
Scenario 1 (Using own cash to service your personal loan for investment in ASB)
1. You service your personal loan using own cash on a monthly basis.
2. ASB Dividend Payout is reinvested for the next 20 years

Calculation:
1. Loan amount + interest paid : RM658 x 20 years x 12 months = RM157,920
2. Investment value in ASB after 20 years : RM492,380.28
3. Net Profit in 20 years (Item 2 - Item 1) : RM492,380.28 - RM157,920 = RM334,460.25*

*The above is a projected value via normal dividend calculation. Net profit might be lower as dividend payment for ASB is calculated on a monthly basis. Please refer to this LINK to find out how ASB Dividend is calculated.

Scenario 2 (Using ASB dividend to service your loan)
1. You service the personal loan using the dividend given by ASB
2. If the dividend is insufficient you will need to top up using your own cash. If sufficient, the extra is reinvested.

Calculation:
1. 1st Year Loan payed using own cash : RM658 x 12 months = RM7,896
2. Dividend Earned after 1st Year: RM8,000
3. Balanced Yearly Dividend to be reinvested (Item 1 - Item 2) : RM104
4. Value in ASB after 20 years : RM105,106.81
5. Net Profit in 20 years (Item 4 - Item 1) : RM105,106.81 - RM7,896 = RM97,210.81**

**The above is a projected value via normal dividend calculation. Net profit might be lower as dividend payment for ASB is calculated on a monthly basis. Please refer to this LINK to find out how ASB Dividend is calculated..

Scenario 3 (Using own cash and investing monthly into ASB)
1. You decide not to take any personal loan, instead you invest RM658 (equivalent to your loan amount) on a monthly basis into ASB

Calculation:
1. Calculated using IME's Investment Calculator based on 8% return from ASB
2. Total Amount Invested = RM658 x 12 months x 20 years = RM157,920
3. Value in ASB after 20 years : RM387,575.43
4. Net Profit in 20 years = RM387,575.43 - RM157,920 = RM229,655.43***

***The above is a projected value via normal dividend calculation. Net profit might be lower as dividend payment for ASB is calculated on a monthly basis. Please refer to this LINK to find out how ASB Dividend is calculated.

Scenario 4 (Using own cash and investing monthly into Fixed Deposit)
1. You decide to invest RM658 (equivalent to your loan amount) on a monthly basis into the bank Fixed Deposit.
2. By saving in the Fixed Deposit, your money is secured from any risk

Calculation:
1. Calculated using IME's Investment Calculator based on 3.5% return from Fixed Deposit Rate
2. Total Amount Invested = RM658 x 12 months x 20 years = RM157,920
3. Net Profit in 20 years = RM228,239.98 - RM157,920 = RM70,319.98

Scenario 5 (Using own cash and investing monthly into Unit Trust)
1. You decide to invest RM658 (equivalent to your loan amount) on a monthly basis into the Unit Trust.
2. You are exposed to risk related to investing in Unit Trust. 10% returns is the average return taken based on investing into High Risk - Malaysia Equity Unit Trust.

Calculation:
1. Calculated using IME's Investment Calculator based on 10% return from Unit Trust
2. Total Amount Invested = RM658 x 12 months x 20 years = RM157,920
3. Net Profit in 20 years = RM499,664.49 - RM158,920 = RM340,724.49

Overall Summary
This is the summary table of Investment Value After 20 Years for all 5 scenarios:

Type of Scenario
Net Profit After 20 Years (RM)
Scenario 1
(Personal Loan, Own Cash, ASB)
RM334,460.25
Scenario 2
(Personal Loan, Dividend Used to Pay Loan, ASB)
RM97,210.81
Scenario 3
(Own Cash, Monthly, ASB)
RM299,655.43
Scenario 4
(Own Cash, Monthly, Fixed Deposit)
RM70,319.98
Scenario 5
(Own Cash, Monthly, Unit Trust)
RM340,724.49

Scenario 1
Pros -
  • Higher net profit as compared to Scenario 2, 3 and 4 as shown in the table above. 
Cons -
  • Taking up a RM100,000 loan will lower your personal borrowing limit which you can use for other purpose such as housing loan or car loan. 
  • You are tied to the loan for the next 20 years. 

Scenario 2
Pros - 
  • You only need to come up with RM7,896 to earn a net gain of RM97,210.81 in 20 years!
Cons -
  • Dividend payout for ASB is not guaranteed. In the event that the dividend payout is lower then the amount you are paying to service your loan, you might need to fork out your own money to service the loan.

Scenario 3
Pros - 
  • You are not tied down to a loan therefore your personal borrowing limit is not affected.
  • In the event that you're unable to put aside RM658 monthly due to financial constraints, you can choose not to contribute for that month. 
Cons -
  • Forcing yourself to put aside RM658 monthy over 20 years requires discipline. If you're unable to do so, your investment goals might not be achieved.

Scenario 4
Pros -
  • Guaranteed returns based on the interest rate agreed upon. 
  • Principal amount is also guaranteed by PIDM.
Cons - 
  • Net Profit over 20 years is way too low.
  • Your savings probably depreciate faster due to inflation.

Scenario 5
Pros - 
  • Returns could be higher then the projected 10%.
  • Dollar Cost Averaging your investment through monthly contribution reduces the price volatility risk.
Cons - 
  • Unit price fluctuation due market volatility and economic changes
  • Read THIS article to further differentiate between ASB and Unit Trust

Choosing the right method of investing depends on a few factors. Some of us are risk takers while some are not. Some of us have the means to invest large amount of money while some of us can barely save. Albeit all these factors, the most important decision you have to make NOW is whether to start investing for your future or wait till it is too late.

Cheers and happy investing!

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17 comments:

  1. Shouldn't we also need to deduct RM157,920 for scenario 3 and 5 as that the cost of investment - RM658 for 20 years

    ReplyDelete
  2. Hi there Fatimah, for Scenario 3 and 5, you don't need to deduct the cost of investment because those are your savings which you will get in return after 20 years. As for personal loan, the amount you pay goes to the bank and not returned to you at the end of 20 years.

    ReplyDelete
  3. But if I see from different perspective ... It doesn't matter if the money goes to bank or goes to my saving .. what matter is both case I need to fork out RM658 every month and the end result : how much that I have in my account. Which in case 1 us 492k while in case 3 & 5 is 387k and 499k. So if we didn't deduct RM658 in the case 3&5 , we shouldn't deduct that in case 1 as well. From what I see, we already reflect that RM658 goes to the bank and not to saving by using the calculator (just put at initial balance and not monthly contribution).

    ReplyDelete
  4. I think you need to show the nett gain/profit with the total cash been invested over the tenure of 20 years. Thus, I agree with Fatimah that for scenario 3, the nett gain would be 387575.43 - 157920 = 229655.43 after 20 years.

    To add on to that, scenario 2 isn't necessary the lowest performing scenario. This is due that you have free yourself from the commitment of servicing the loan and with extra RM658 cash flow per month, you may consider other invesment vehicle such as equity, properties, bond, etc which has higher risks than ASB or Unit trust.

    ReplyDelete
  5. I'm sorry to be posting anonymously, but I believe the calculations for scenario are off. Even in the event that we do pay for our loans, however the initial lone amount (100k) does indeed become yours at the end of the 20 year period, therefore even if you were to deduct some money, the amount deducted should only be the interest payments.

    Just my two cents.

    ReplyDelete
  6. @Anon: First of all it's a loan. That means the money eventually has to go back to the bank. You don't get the money. You just borrow it. The first scenario is where you earn dividends from the initial loan amount (which you'll have to pay back fully since it's the bank's money, not yours, so -RM100,000 after 20 years) and you also have to deduct interest. His calculations are valid.

    ReplyDelete
  7. agree with anonymous, the amount to deduct is the interest paid throughout the loan period.. for this scenario 1; 3. Actual Value in 20 years (Item 2 - Item 1) : RM492,380.28 - RM57,920 = RM434,460.25

    ReplyDelete
  8. dear 'genius financial consultant', what all comments above said is true
    you need to deduct 658x12x20 as well
    why dont you stare at your calculation and dig deep
    you will find your mistake
    if not, just show this calculation to someone expert,perhaps a math teacher

    pffff.financial consultant...
    make me laugh

    ReplyDelete
    Replies
    1. I've never claim myself to be a genius financial consultant or anything like that. Not sure how you came to this conclusion.

      However your harsh comment left me pondering about this article which was written when I started blogging as an investor learning about investment.

      I've have looked back into the calculations and readjusted the term to Net Profit as highlighted by AdCool. This provides equal term for all Scenarios except for Scenario 2 which is a tad different from the others.

      Never the less, I thank you for your belittling comment as it triggered me to look back at mistakes I have made.

      Cheers

      Shane See

      Delete
  9. Personal loan is not equal to asb loan. You could''ve misled others. Imho.

    I''ve written about this way back, but my blog ain't active anymore. It's still valid though for comparison.

    You may want to read:
    http://investmentkopitiam.blogspot.com/2012/01/asb-loan-vs-traditional-deposit-to-asb.html?m=1

    ReplyDelete
  10. Hi Shane, you've done a great job with this blog of yours. There will always be shallow people trying to belittle you with harsh and rude comments. If they are that good themselves, they won't be needing to read your blog. No appreciation for the knowledge gained from reading your blog yet trying to outsmart others...Hairul Anuar, please don't comment here as your English proficiency is poor and you should go and find a language teacher..Keep up the good work Shane!

    ReplyDelete
  11. To the Anonymous above me,

    'Good job' on attacking someone's English while ignoring the points that he made. That attitude will get you far in life...

    ReplyDelete
  12. Pls do remember that ASB max investment is only 200k. But I 've made my own calculation. U will get 500k in 25 years with ASB loan of 115k for 25 years (assuming investing in ASB + ASB2).

    ReplyDelete
  13. all of you are old fashioned , depending on ASB , unit trust & what not ...Please PUNT in the stock market @ Bursa Malaysia - with warrants , penny , IPOs you will hit RM 1 millon much much faster !
    ASB especially formalated to OLANg KAMPONGS.....!!

    ReplyDelete
  14. Scenario 2 is the best....as your investment amount return is multiplication of 10 times more whereas all other scenarios have return of multiplication of 0.5 to a bit more than 2. Scenario free you totally of the monthly commitment. Thanks for the good analysis and I know what to do now.....

    ReplyDelete
  15. Hi Shane!

    Thanks for writing this entry. Though not a regular visitor of your blog, I've been benefiting from some of your entries like this.

    Just ignore the harsh words of the naysayers.

    Keep sharing for there are always silent readers who benefit from your financial blog.

    Again, thank you very much.

    ReplyDelete
  16. my name is Mrs.Rachel Alex from singapore few months back i was financially strained i rushed to my bank to apply for a loan to start up my business but i was denied by my bank because of my credit score and they could not help and due to my desperation i was scammed by several online lenders who promised to help me but at the end i was scam i lost my money and my hope because i was so frustrated, One day when i was going through the internet again i found one lender call Mrs.Irene Query i thought to give it a try one more time to my biggest surprise she was able to lend me a secure loan totally the amount of $300,000 for the first time in my life i realize that there are few lender who don't scam people her name is Mrs.Irene Query i will advice any body that are in need of loan to contact him with his Email (mrsirenequery@gmail.com) he can be able to help you because he was a God sent to me this year and i will never forget him for the help he render to me. contact him via email:(mrsirenequery@gmail.com) Thank you.

    ReplyDelete