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

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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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A Guide Towards Understanding Unit Trust Performance Table

Let's begin by looking at a sample Unit Trust Performance Table shown below:

Definition according to the number tagged in the picture above:

( 1 ) Fund Name

Duh! Basically this refers to the name of a specific Unit Trust Fund. 

( 2 ) Fund Price

When investing in Unit Trust, we are in fact purchasing "units" based on the fund's price. Fund price changes on a day to day basis based on the calculation which I will explain next.

Determining the Fund Price

Fund price also commonly known as the Net Asset Value (NAV) per unit is calculated by adding up the current value of all the stocks, bonds, and other securities (including cash) in the fund's portfolio, subtracting out certain daily expenses of running the fund (e.g the management fees, trustee fee, and other operating expenses) and then dividing that figure by the fund's total number of units. A fund price is always calculated at the end of each business day. 

For example, Fund X intends to calculate the fund price per unit at the end of a business day with the following information:

a) Asset at end of business day : RM48,200,000

b) Liability at end of business day : RM200,000

c) Total number of units : 80,000,000 units (referring to the units purchased by investors)

Fund price per unit : (RM48,200,000 - RM200,000) / 80,000,000 units = RM0.60/unit

On the following business day, investors can then purchase units from this fund at the price of RM0.60/unit.

( 3 ) Fund Manager

The organization / company responsible for implementing a fund's investment strategies and managing its portfolio trading activities. If you read deeper into a Unit Trust Fund prospectus you will also find the individual / person in charge of managing your fund.

( 4 ) YTD (%)

YTD is short for Year To Date. YTD (%) is the percentage difference between the Fund Price on the last day of last year to the Fund's latest closing price.

Sample calculation as follows:

a) Fund Price for ASM Balanced Fund on 31 Dec 2012 : RM0.7296 /unit

b) Fund Price for ASM Balanced Fund on 18 Jan 2013 : RM0.7319 /unit

% Year To Date : (RM0.7319 - RM0.7296) / RM0.7296  X 100% = 0.32%

When looking at YTD (%), we are comparing the latest performance of the fund against the benchmark price of the previous year. 

( 5 ) 1 mth (%), 3 mth (%), 6 mth (%) and 1 yr (%)

Somewhat similar to YTD (%), but with a little twist to it. For example when looking at the performance table of Unit Trust as of 15th January 2013, the 1 mth (%) is the percentage difference between the fund price on 15th January 2013 with the price of the same fund a month ago (15th Dec 2012). 

3 mth (%) : Percentage difference between the price on 15th January 2013 with price on 15th Oct 2012

6 mth (%) : Percentage difference between the price on 15th January 2013 with price on 15th July 2012

1 yr (%) : : Percentage difference between the price on 15th January 2013 with price on 15th January 2012

( 6 ) 3 yrs (%) and 5 yrs (%) annualized

When investing into unit trust, we should be aware that performance of a fund varies from year to year. Profits and losses are indicated by the comparing the percentage difference of the fund's NAV for one financial year to the previous financial year. Different funds have different financial year end and should not to be confused with our normal calender year end of 31st December.

Here's a sample Annualized Returns for a fund: 

Referring to table row for "Jumlah Pulangan (%)", we see that as by financial year end 30th November 2011, this fund posted 3.17% growth on NAV from the previous financial year. For 2010, the growth is 12.60% and 21.96% for 2009. During the 2008 economy downturn, the fund posted -17.96% losses from its previous year NAV. Clearly profit and loss for any unit trust fund tend to vary from one financial year to the other.

To compare funds using actual year performance such as the one above is rather difficult due to different financial year of each unit trust fund. Furthermore, yearly comparison does not reflect the overall objective of evaluating the long term performance of a unit trust fund.

Hence when it comes to comparing performance of unit trust funds for duration longer then one year, each unit trust performance are "annualized" to reflect the average performance per year of a fund with reference to a specific date.

For example, whenever you read or hear that a fund returns 10% over a period of 3 years (%) annualized as of 31st December 2012, the information should be perceived as average 10% returns every year measured on the 31st of December for the past 3 years..

5 yrs (%) annualized is similar to the 3 years concept except that the duration of average returns is over a period of 5 years.

( 7 ) Shariah Compliant

A shariah compliant fund is denoted by "Y" and a non-shariah compliant fund is denoted by "N".

What is Shariah Compliant Fund?

Shariah compliant funds must invest according to the Shariah law as well as abide to the guideline of Islamic Finance. Shariah compliant funds provide an opportunity for our fellow Muslim friends to partake in unit trust investment without worrying if profits are obtained from non-halal sectors such as gambling and liquor.

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#17th March 2013: Additional Information for Understanding Unit Trust Performance Table

a) Funds are divided into 4 Main Categories consisting of:

• Asia Excluding Japan
• Equity Malaysia
• Greater China
• Fixed Income (Malaysia)

b) All funds are ranked according to their Average 5 Year Returns (Annualized). 

c) Movement of funds on the ranking table are indicated by the colored bars below:

Fund movements are determine by comparing their previous ranking.

d) Apart from the Top 10 Unit Trust Performing Table, there is also another table that shows the Best Performing Fund according to Gain/Loss within a 2 week period. The Best Performing Fund According to Gain/Loss within a 2 week period allows investors to monitor:

• The previous ranking and current ranking table in order to ascertain which fund is consistently performing (as indicated by the red box in the sample below).
• The average 2 Weeks Gain/Loss in Percentage. This signifies the overall average performance of all 10 funds in a particular category (as indicated by the blue box in the sample below).

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Cheers and happy investing!

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Gold Price to Hit Record High In 2013!

Our local daily, theStar reported that gold prices are expected hit a record high this year as seen in this article dated 17th January 2013 below:

Full Article available HERE

Hurrah indeed for gold owners if the price does indeed go up by the end of 2013. Franklin Sanders from the The-Moneychanger.com is targetting gold price to rise up till $3,130 an ounce as seen in this excerpt taken from Goldprice.org:

Obviously there are also other news/articles on the web predicting the opposite. For every positive news found on the web, there will always be an opposing view, something like the yin and yang of the World Wide Web. To maintain balance of the World, albeit a virtual one, one must have equal number of good and bad news in order to appease every single virtual netizen. 

 As for myself, I have a small portion invested into paper gold. I bought paper gold even before I started this blog and the reason is simple, I liked the convenience of owning gold without the hassle of owning and safekeeping physical gold. For those who have not heard of paper goal, here's a simple definition:

However, I would like to caution readers that investing in paper gold does come with certain risks. Since investing in paper gold is not insured by Bank Negara (the same goes for Unit Trust), there's a possibility that you might lose your entire investment if the bank you bought your gold from defaults. Considering that there is no physical gold being exchanged for your money, what you really own is a piece of paper or passbook stating that you own gold which in reality is non-existent. Purchasing paper gold is in fact placing your money and trust with the bank you are purchasing from. If you seriously believe that our local banks such as Maybank, Public Bank or CIMB can default or go bankrupt (tutup kedai, gulung tikar), then I suggest that you stay away from paper goal gold. Do correct me if I am wrong.

If you like to know more about paper gold offered by our local banks try reading:

1. Gold Investment, paper style ~ article published by theStar dated 11 March 2012

In future, I'm hoping to look into purchasing physical gold (kena old fashioned abit). There's much to read up and learn before I make my first foray into physical goal. For now, I am contented with investing in paper gold and reading the yin and yang news from the World Wide Web.

Cheers and happy investing

MY Investor

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