iProperty.com Expo 2012 @ Midvalley Exhibition

Just left the exhibition...properties around KL and Selangor area are so expensive these days. Looking for a reasonably priced property these days is like searching for a needle in a hay stack. Which is why we have REITs to invest in!

Private Retirement Scheme (PRS), What's In Store For Investors? - Part 1

While many investors are excited with the latest investment vehicle in the form of DanaInfra Retail Sukuk which is schedule to be listed in our Bursa Malaysia somewhere in February 2013, I for one decide instead to blog about Private Retirment Scheme, or in short PRS.

In one of my older post, I did share the PRS FAQ from Security Commissions yet couldn't find myself to finish reading the entire FAQ. Being an Amateur Investor, this is my own attempt in trying to explain PRS. While I am writing this post, I am actually learning and sharing that knowledge with everyone. I hope you'll enjoy reading about PRS in this articles as much as I suffer enjoy writing it!

What the heck is PRS?
"PRS is an investment scheme that facilitates the accumulation of retirement savings through voluntary contributions. The PRS is designed to complement the Employees Provident Fund (EPF) and is regulated by the Securities Commission Malaysia (SC)." 

Simply said, PRS is another form of investment option for us to save up for retirement. PRS is somehow similar to our EPF whereby your investment is locked away only to be made available upon retirement. The difference is that we get an option to choose our investment risk unlike EPF where the investment nature is more conservative (check out our EPF annual returns HERE)

Do be reminded that PRS does not replace the function of EPF, rather it provides an additional option for investors to save up for retirement. There is no fixed amount that you need to contribute and neither are you required to contribute monthly to PRS. 

Investing in PRS is similar to investing in Unit Trust albeit with a couple of small differences which I would highlight later. Just like Unit Trust, PRS provides investors with the options to select what kind of fund they would like to invest, the risk level, islamic or non islamic, area of investment and the amount to invest in.

Where can I buy PRS fund from?
Currently there are 6 approved PRS Providers (Securities Commission Malaysia approved financial entities that can offer PRS type funds to the public) consisting of:
1. CIMB Principal
2. Manuflife
3. Hwang Investment
4. RHB Investment
5. ING Funds

PRS Funds can be purchased from PRS providers, sales agents, banks or online platforms.

What type of PRS Fund is available?
Each approved PRS Providers must provide a minimum of 3 types of fund. These funds are called Core Funds which consist of:

Core Funds are categorized according to the age group of investors. The older you are, the lesser risk the fund you are recommended to invest in.

In addition, PRS Providers are also allowed to provide Non-Core Funds for investors. Therefore you will also be finding high risk PRS funds (70-99% of NAV invested in Equities) being made available for the young and dangerous adventurous.

Are you Young and Dangerous when it comes to investing??

Investors regardless of their age are given the freedom to select any PRS fund suited to their risk appetite.(I hope I am right on this). Never the less, it is highly recommended by Securities Commission Malaysia that investors pick the fund that is designed according to their age group.

Who is looking after my PRS Investment?
Before you can start investing in a PRS Fund, it is required to register an account with an independent body called Private Pension Administrator (PPA). PPA acts on behalf of their members in terms of:

- Facilitating and maintaining all PRS-related transactions made by members;
- Facilitating portability between PRS providers; and
- Undertaking promotion and general education/awareness on PRS.

A PPA account consist of two sub-accounts. Sub-account A comprises 70% of contributions and sub-account B which comprises 30% of contributions. Full withdrawals from the PRS account can only be made upon the satisfaction of certain criteria* and partial-withdrawals can only be made from sub-account B subject to restrictions and penalties**.

*Reaching the prevailing retirement age, death or leaving Malaysia permanently.
**Members may only withdraw the amount in sub-account B once a year. The withdrawal amount is subject to a pre-retirement withdrawal fee of RM25 and also a tax penalty of 8%. The tax penalty will be deducted before the balance is credited to your account. The first pre-retirement withdrawal is allowed only after a year from the date of the first contribution by the PRS contributor. Subsequently, pre-retirement withdrawals will be allowed once in every calendar year.

How does PRS Works?
To understand the above, I use the analogy below:

Your Money : Prisoner
PRS Provider : Prison Cell
PPA Account : Prison Database
PPA : Prison Warden
Term of release from Sub-account A : Your Retirement Age
Term of release from Sub-account B : Your Retirement Age
Withdrawal fee RM25 & Tax Penalty of 8% : Bail money if you intend to release prisoners from Sub-account B before retirement age

The concept is for you to send your money(in this case the prisoner) into prison every time you've extra and/or on a monthly basis. The term of imprisonment for your prisoner is till your retirement age. All your money will remain in prison (PRS Provider) and will be governed by the Jail Warden (PPA). Each prisoner (each investment) you send to jail is then tracked via a Prison Database (PPA Account).

You're only allowed to release one prisoner per year by paying a withdrawal fee of RM25 and tax penalty of 8% from the amount withdrawn. Therefore it is best for you to leave your prisoners in prison and let them work hard till you retire!

Why PRS for Retirement?
Like it or not, when deciding to invest in PRS, we are actually forcing ourselves to save+invest additionally apart from depending entirelt on EPF for retirement. The problem with depending entirely on EPF for your retirement is:
1. The average annual return of EPF for the past 5 years is only 5.5% (to slow lahhh...)
2. Inflation is about 3-4% and might rise higher in years to come.
3. The amount accumulated in EPF when reaching retirement is insufficient to cover the expenses of a person who has retired.

Allow me to expand on point number 3 by taking a look at the Table for Average Accumulated EPF Savings for Malaysian as of 2011:

Let's do a couple of case studies based on the figure above:

Case Study 1 - Investing my EPF when I retire (case of too little too late)
Now say for example I retire at 55 with RM130,833.03 in my EPF account. I decide to withdraw all that money and invest in a fixed income fund earning about 6% a year and live on the yearly returns. That would come up to about RM7850 per year or RM654.17 per month! Not too sure if I can live comfortably with that amount. Seriously, Money No Enough lerrr...

Case Study 2 - Living on EPF (case of being too old fashioned)

I decide not to invest but to withdraw all the money from EPF and keep it under my bed. Instead, I'm going to slowly use that money till I meet my Maker at about 75 years old (if I live longer then 75, the God help me!).

With RM130,833.03 and 20 years to live, I'm allowed me to spend an average of RM545.14 per month or RM17.58 per day. By the way how much does that loaf of bread cost again?

Obviously bigger income earners tend to contribute more to EPF and should have sufficient money saved up by retirement. Never the less, wouldn't you prefer to live a better and more comfortable life during retirement?  Would you not prefer to have the extra to go on an annual holiday with your loved ones? I seriously doubt the same can be said for Case Study 1 and Case Study 2!


Summary
In the second part of this PRS series, I would be writing about the immediate benefits you get from PRS, what are the funds available and what would the expected performance of these fund be. If you like this article, please do the following:
1. Share it on your Facebook!
2. Like my Facebook Page
3. Subscribe to me. See the "FOLLOW ME TO FINANCIAL FREEDOM" section located at the top left? Just key in your email and click Submit.

Till then, Cheers and Happy Investing!

Read Part 2 : Private Retirement Scheme (PRS), What Is The Expected Performance?

Read Part 3 : Private Retirement Scheme (PRS), Enjoying The Benefits of Tax Relief 

Exchange Traded Bonds and Sukuk (ETBS)

Bonds/Sukuk have always been seen as an asset class to hedge when markets are bearish and a means to develop a steady income over many years. But in the past the bonds/sukuk market was accessible only to high net worth and institutional investors.
 
Now with ETBS, all investors can have access to the bond/sukuk market with ease, via the stock market.

What are ETBS
 
ETBS are fixed income securities, also known as bonds or sukuk*, that are listed and traded on the stock market. ETBS are issued either by companies or governments (the issuer) to raise funds for their needs. ETBS have varying structures such as fixed rate, floating rate and hybrids.

Why Invest in ETBS?
 
Here are some of the reasons to invest in ETBS:
 a.Flexibility and Ease of Trading: ETBS are traded on Bursa Malaysia, making the buying and selling of ETBS as easy as trading in shares.

 b.Transparency: As ETBS are listed on the bourse, investors will have access to real-time prices and volumes, just like shares. This will enable investors to continuously monitor their investments and receive up-to-date information.

 c.Diversification: Investors can diversify their portfolio to include ETBS to complement their investments in other asset classes such as equities, derivatives, unit trusts, etc.

 d.Additional Income Stream: Investors can benefit from a steady income stream through regular coupon payments.

What are the factors that determine the price of an ETBS?

a.Price and Yield
 ETBS pricing and yield are primarily determined by the demand and supply in the marketplace. Investors want as high a yield or return for their investment as they can get, thus when ETBS prices are low, investors are willing to pay less for a ETBS and therefore getting a better yield. In contrast, a high ETBS price would mean returns are lower, as coupon payments for an ETBS are generally fixed to the principal value of the bond.

b.Interest Rates
 When interest rates change, ETBS prices change in response. This sensitivity to interest rates is one of the key influences on ETBS prices. Supposing the average interest rate available to investors goes up, the ETBS’ current yield will become a less attractive investment. This would result in investor demand falling off, causing a decline in the ETBS price; until the point where the yield becomes competitive with prevailing rates. The reverse occurs if interest rates go down.

c.Risk
 Investors must consider the credit risk of the issuing entity before investing in its ETBS. Essentially, credit risk is the likelihood that the issuing entity will or will not be able to repay principal amount and its interest elements at maturity.

 This particularly applies to corporate ETBS, because corporations have more risk than most governments.

 ETBS are evaluated and rated by several agencies, including Malaysian Rating Corporation Berhad (MARC) or Ratings Agency Malaysia Berhad (RAM) for Malaysia while Moody's and Standard & Poor's for international rating. A top rating (AAA) means the ETBS carries the least credit risk. If a company's rating is downgraded, the ETBS will normally fall in price because investors won't pay as much for them.

d.Maturity
 The future is always less certain than the present. In the financial world, uncertainty translates into risk. Consequently, ETBS with long maturities have somewhat more risk and tend to be priced lower (or have higher yields). As these ETBS eventually start to approach their maturity date, their prices start to get close to the par value. That's because investors know they will soon be getting their money, and little credit risk remains.

What are the minimun investment units?
 
ETBS are traded in minimum board lot size of 10 units per lot size. Given the principal price of RM100.00 per unit, each board lot will cost RM1000, excluding transaction costs.
  
What are the risk?

a.Credit risk
 This risk arises if the ETBS issuer is unable to pay the coupon payment on the coupon date or the principal amount to the lender at maturity. Government bonds and sukuk are backed by the central government, thus deemed to have a low credit risk.

b.Market risk
 This is the risk of price fluctuations and is impacted by the demand and supply in the market.

c.Interest rate risk
 Valuation of the ETBS may be affected by the changes in interest rates e.g. if the interest rate rises, ETBS prices will fall as investors may relocate their investment to capture a rise in interest rates available in other instruments, for example, in bank deposit.

How and where to start investing in ETBS?
 
ETBS trade like stocks, and are subject to the same trading payment and settlement rules (T+ 3). You will need to visit your nearest Participating Organization (stock broking firm registered with Bursa Malaysia) to open a securities trading account and Bursa Central Depository System (CDS) account.
date, and may or may not be redeemable.

(taken from the Bond Section of Investlah.com)