Why Mutual Funds Are Great For First Time Investors

CompareHero.my gives you the lowdown on what you need to know about mutual trust funds and why it’s ideal for first time investors.

What Are Mutual Funds?

Mutual funds (a.k.a. unit trust funds in Malaysia and referred to as such in this article) are an investment method whereby assets management companies (e.g. securities investment trust companies) get capital from the public by issuing specific quantity of shares or beneficiary certificates.

The company then uses the investment from the public as capital for their professional investments. Basically, it is an investment method through the sharing of risks and profits. Among the types of unit trust available are equity funds (the most common type), fixed income funds, real estate investment trusts (REITS), balanced funds as well as syariah funds.

There are risks involved when you choose to invest in them, but you can also decide the risk tolerance level and choose to invest in unit trust with risk ranking from low, medium or high risk.

Why It Is Good For First Time Investors?

Affordability

Unit trusts are affordable and beginners can start with an investment from as low as RM100, depending on the type of unit trust fund you invest in. You can then buy additional units when you have more money and grow your investment.

Regulation

As a beginner in investing, you can take comfort that unit trust funds in Malaysia are under the regulation of the Securities Commission Malaysia which is the sole regulatory body for authorization of establishment of unit trust funds, including the approval of the fund’s management company.

Professional Management

Investing also means that an individual would need to maintain his or her own portfolio of investments. This includes keeping up to date with the financial market information which can be difficult for individual investors.

What’s great about investing in unit trust funds is that it transfers most of the hassle to the professional fund managers. The people who are entrusted to manage the unit trust are all approved professionals whose training and background ensure the decision making will be based on sound investment principles.

Diversity

For those interested in equities but lacking the funds to diversify, unit trust funds offer the opportunity to invest in diversified portfolio with a low starting capital. Rather than investing into a portfolio of only one or two investment or shares, the unit trust portfolio usually consists of a combination among which are cash, bonds & deposits, shares, properties and commodities.

Simply put, the wider the spread of the investments means less chance for volatile investment returns. So investing in unit trust provides a diversification of risk along with opportunity to invest in a diversified portfolio.

Beat The Inflation Rate

You can have the option to invest in low risk unit trust funds, making it a good option for first time investors rather than leaving your money idle in the bank. Investing in unit trust funds can help you beat inflation and make your money work for you as most funds provide potentially higher returns compared to if you were to put your money into a savings account.

How To Choose The Right One? 

The first thing to do is to weigh the risks and merits before deciding on an investment. You do this by reading the prospectus of the company which you are looking to invest into. You need to know how your money will be invested, where it will be put into and also the fees and charges involved.

Among the charges are the initial service charge and the annual management fee. In addition, the key factors to take into consideration when deciding on an investment is the safety criteria, stability, liquidity and the risk-adjusted returns.

When Is The Right Time To Invest?

Before you decide on any investment, you need to set your financial goals. Are you looking to generate a second income or looking to grow your money? If you’re looking to grow your money, ideally it would mean the investment would be a long term investment. If you’re planning for the investment to be a form of your second income, then it would be a short term investment. The next step to take would be to make sure you clear any existing debts before you start investing your money.

Check out InvestSmart by Securities Commission Malaysia for more information and to get the latest updates on unit trust funds.

A look at the PRS Conservative funds

It is time for me to look at some of the PRS funds (due to taxes) and I thought that unlike last year, I want to do some research. Last year, I just went to a most convenient bank and picked an aggressive growth fund as I thought that with many years to reach 55 years old :), hence I might as well be slightly aggressive.

This year though, I wanted to take a back seat and be conservative (to also balance my investment in fund). This means that for this year I am for conservative funds perhaps. Taking a cue from AIA's Conservative funds (as below), a conservative fund basically invests 80% of the money into fixed income and money market instruments and remaining 20% into equity.

Fixed income as in the name is most of the time investment into bonds (usually high grade) while money markets are securities which are shorter time in nature and these are high grade securities. All in all, I expect to secure decent and above fixed deposit rates return. Add in the tax incentives, it should be good savings and return.

One way to look at which fund to choose is to look at its past performance (I know one should not measure performance on its past, but how else?). As PRS scheme is a new scheme for most of the funds, they have been in existence for slightly more than a year. These are what I have found - which is quite surprising. (Remember me saying I expect above FD type of return.)

CIMB Plus Islamic Conservative - 1 year return 2.8%

AMPRS - CONSERVATIVE FUND - CLASS D - 1 year return 1.6%

Affin Hwang Conservative - 1 year return 3.6%

AIA PAM - CONSERVATIVE - 1 year return 2.7%

Manulife Conservative PRS - 3.4%

RHB Conservative - 1 year return 3.2%

Manulife Shariah PRS - Conservative - 1 Year return 0.6%

Based on the above, among the conservative funds, it can be said that over a short 1 year period, the best performing one at 3.6% return is Affin Hwang while worst performing one is Manulife Shariah at 0.6% return. On average, these 7 funds I looked at provided 2.557%. If I were to compare against most of the fixed deposits, they provide return of between 3.2% to 3.4% over the last 1 year. Could I claim that these conservative funds underperformed?

In fact, if I were to eliminate the best and worst performing from the average, it is still giving average return of 2.74%.

The worrying thing is that these funds does not create much value, except for the government's incentive of tax deduction up to RM3000 invested. One can argue that we should not look at these funds over the short term. I agree as I myself pitch long term. But these are funds that largely invested into fixed income securities. Fixed income provide in most cases fixed return. Yes, they are tradeable in the secondary market, hence the fluctuation in prices, but aren't one been paid and taught how to look at the interest and bond market movement? In any case, these are conservative funds.

They are not creating value! To me. And without the incentives from government, these will not stick!

P.s. I did not include some of the funds e.g. Public Bank's which registered 3.41% return over the last 1 year.

Also the fund management guys will not like me, but these are FACTS!

Another place to look at the performance is through Morningstar i.e. here.

Budget 2014: Up to 61% tax incentives for youths through PRS

This is a guest article and the opinion is strictly from the writer.

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Now, I know Budget 2014 is almost 2 weeks ago but I am surprised no one really puts this into perspective.

In fact, many are unaware of this very fact because GST and removal of sugar subsidy stole the limelight.

I am referring to the RM 500 one off incentive (read: almost like cold hard cash) to Private Retirement Scheme  (PRS) contributors with minimum cumulative investment of RM 1,000 - to be implemented from Jan 2014 onwards for a period of five years.

Let me explain.

If you are in the mid to late twenties, chances are that your annual chargeable income falls in the range of RM 35,001 to RM 50,000. The tax bracket for this income group is 11 percent..

That means, your actuals monetary savings for any tax relief eligible to you is 11 percent of the tax relief amount itself.

If you invest RM 1,000 into any of the funds by any PRS fund providers, you get RM 110 worth of tax savings.

With this tax savings of RM 110 and the RM 500 incentive, you are getting RM 610 of tax incentives.

But then it gets even better.

Most of the tax reliefs are “expenses type”, which means you need to spend money to get the tax savings. Things like computer purchase, insurance premiums, etc.

But this PRS contribution is one of the few “savings type”  tax relief. Just like when you invest in any unit trusts or shares, your investment may grow over time.

If you visit Private Pension Administrator (abbreviated PPA - the central administrator for PRS) website now at http://www.ppa.my, and check under Providers > PRS Funds Information > Daily Fund Prices, you can see the investment returns of all PRS funds from all providers.

One of the top performing funds yielded a year-to-date return of slightly more than 18% in just under a year.

Although past performance is not an indicator of future performance, if this performance continues, you are essentially getting RM 180 return out of the RM 1,000 you invested.

Add this up with RM 610 we calculated earlier, you are getting up to RM 790.

That’s 79% return.

Not many stocks could give you a minimum 61% return and up to 79% return within a year.

As an independent financial adviser, I can tell you wealth accumulation is not just about investing. We should always adopt a more holistic approach - this is a very good example of tax savings which indirectly translates into surplus. You could treat this as your investment return which is guaranteed.

Every single savings count. The wealthy mind their money, and they say - “if you don’t take care  of your money, money won’t take care of you”

Even if you don’t qualify for individual BR1M handouts, grab this opportunity highlighted above starting 2014.

This is a community message to all youths by Lieu Ching Foo, the founder of  personal finance blog - http://HowToFinanceMoney.com. 

Note: besides the RM500 incentive for those below 30 years of age, the government has provided tax incentive with relief up to RM3,000 for those who puts in his / her money into PRS, in its budget for 2012. The relief is for first 10 years from assessment year 2012.

When investment does not turn out as planned

I remember one reader asked me about unit trust. I can only say I am sorry if my sole experience turned out to be not a sweet one. Although I have not thought of this investment (in fact sometimes I forgot about it), I did not have the chance to close it after intending to do that 6 years ago.

And since my brother is in town this week, I have decided to close my single and not so successful unit trust investment in my lifetime as his name is in the fund as well. Back in 1995, after a bad 1994 experience in the stocks, I decided to park some of the cash from my savings into a fund. I thought that since I did not make money from investing myself, why not letting professionals do it for me. Professionals, hmmm.... may not perform better than any layman on the streets though despite they continuing to charge you fees.

Despite being just RM1,500, that decision to put this savings into one of the local unit trust fund is not a beneficial one, although it is a lesson learned. How did it performed?

After 17 years or exactly 6,355 days, I made an amazing 7.5%, closing at an earned profit of RM110.32. How nice.

I am going to celebrate by going for a nice dinner tonight!