HOW I MANAGE YOUR INVESTMENT? < Part 4 >

This is the final part of 4 series.
Still based on the example in Part 2 ( Moderate profile, exp return of 6.20% and 50K
investment), the current return column in the top table now has value already (as a result
of market trading). Please see the table below and take note of the return too. The return
performance is also displayed on a graph for better viewing.

CARTOON TIME

When passing an important message to your subordinates at work place or  trying to convey some salient points of the investment products you are promoting, the targeted recipients of your messages would go nuts if you speak languages that only you can understand.  STOP!!

Re-engineer your spoken words, put it in simple English and avoid too many bombastic words.

Amanah Saham Malaysia (ASM)

The unit trust funds that Permodalan Nasional Berhad (PNB) distributes had vastly attracts many malaysians into owning a certain portions of units. To some, Amanah Saham Malaysia (ASM) funds is the golden opportunity they could not resist purchasing, as it generates a promissable stable and high return with contrast to other unit trust funds distributed by Unit Trust Management Company (UTMC). In fact, the returns outpaced the one year tenure of any prevailing Fixed Deposit schemes offered by local financial and banking institutions. Therefore, seeing a sight of long curving queue of people waiting infront of selected distribution agents of PNB ready to purchase the 'Dana' ASM is not a surprise to many.

But wait!! Think first before you decide. Is ASM the right fund to buy?

Below, i have pen down some salient points that you might not have known or told of about the characteristic of this ASM, in contrast to the other funds of UTMC's.

There are 2 major points which an investor should weigh prior to decision-making, and they are the fund's published selling unit price and secondly the fund's ability to declare distribution. Investors make a placement judging on this two sources of income.

1. UNIT PRICE

Amanah Saham Malaysia(ASM)

It is high and it is fixed!! The unit price stays throughout the life of the fund. And because of the price is high, the number of units purchased are always low.

With an initial capital of Rm1000, and if the selling price is Rm1.00, you will be given only 1000 units.

If you purchase a unit of ASM that cost Rm1.00, that fund will remain valued at Rm 1.00 at anytime in future.

We refer this as NO CAPITAL GAIN.

Other Unit Trust Management Company (UTMC) funds.

In contrast to ASM, other UTMC's funds carry a much lower selling price and the price does not remain stagnant indefinitely. The unit trust prices are quite volatile and it fluctuate based on the principle of demand and supply factor. As a result of this changes in price, the feature provides an investor the possibility of reaping capital gain, i.e. the growth of unit prices. In the same token, an investor may also face depleting unit prices, i.e. the fall in unit prices.

Suppose you buy an unit for Rm 0.2500 now, and the fund's price has the potential to move upwards. Lets say if it moves to Rm 0.3000 a unit, the difference of Rm 0.0500 a unit will be the gain for you! We refer this as CAPITAL GAIN!

If an investor with a capital of Rm1000 purchases a unit trust fund that sells at Rm 0.2500 (ignoring the sales charges), he/she will be earn 4000 units, which is 4 times more than ASM units of the same initial investment. Is not this great?

So, with regards to unit price, ASM scheme does not stand out to funds of other UTMC.

I will write about the other source of income, i.e. Distribution, in the next web blog soon.

Regards,
Dave

Between ASN funds and other UTC's funds - Which is better? RE-PUBLISHED

1. PRICE PER UNIT (also known as NAV) AND NUMBER OF UNITS.

          When a comparison is made, generally the Net Asset Value (NAV) of Amanah Saham Nasional
          (ASN) will always be greater than any other NAV of (Equity type) funds that belongs to other Unit  
          Trust Company (UTC)
          This in return will leave the account holder with lesser units than those who purchase (Equity type)
          funds from other UTC.
          Example: In reality the NAV of ASN is always RM1.00 per unit and the NAV of funds (Equity
          type)  of UTC will
          generally starts at RM0.25 a unit (new fund launch price). So if you invest RM 10000, your units if
          you purchase ASN, assuming sales charge is 5.50%, will be (RM 9478.67/1.00) = 9478.67 units.
          Alternatively, if you purchase a new fund from other UTC, and assuming the sales charge is 5.50%,
          your units now will be (RM 9478.67 / 0.25) = 37914.68 units.
          What it means?? It means, given a same invested amount, ASN gives lesser units
          than of other Equity type funds from any UTC.

          In Unit Trust Scheme, your return is directly related to the number of units you purchased.

•           More units = Higher return.
•           Less units = Lower return.

         Price per unit between this two types of fund also varies tremendously. ASN's price a unit (which is  
         normally RM1.00 a unit) is way too high when compared to RM 0.2500 a unit of equity funds from
         other UTC. So, if next time if you want to decide to buy unit trust funds, please observe the price per
         unit and with that price do check how many units you would be given!!
         

Real return vs. Nominal return

Great number of people do understand that a savings or fixed deposit (FD)account in local financial institution generates a decent return for money kept for a duration of times.Mostly are satisfied with the return, albeit is a small quantum. However, people are getting more and more investment savvy;thanks to the vast pool of knowledge the electronic mass media and the much prevailing of information flow that is reaching our population.People are more knowledgeable these days in comparison to a decade ago.
Going back to the subject of 'return' from savings or FD, the return is a nominal type and therefore does not reflect the real gain/loss in value which the money in relation carries throughout the holding period. To illustriate;

Example:
A RM 10,000 deposited in a FD account that gives you a return of 3.70% per annum will generate RM370/- as interest at the end of first year(assuming the money is kept for a year).
After the first year, your total money received will be the sum of principal (RM 10000/-) and RM 370/- (the interest gain)which will sum up to RM 10370/-.

Now, ironically, this return reflects a misleading picture as far as real return is concerned.

Why? It is because that RM 10370/- does not take into consideration of the inflation rate factor. Ignoring the effect of inflation will to a greatest extend prompt you to make unwise financial related decisions. The risk of inflation is a determining element in achieving real returns! So, how do we incorporate the inflation rate into the FD return as in the example above?

Do assume that all data in the example above remains the same. In this context assume that there is an inflation rate of 2.0% on the back of the 3.70% FD rate. In continuation, the Inflation-Adjusted-Interest rate is now hereby computed as :

(r-i) / (1 +i)power of n

Where r is the FD return per annum
i is the inflation rate given.
n is the number of years of the holding period.

Now, after substituting the data in the example above into the formula given, you will get a figure of 1.67% as the inflation-adjusted-interest rate.

Next step is, to replace the 3.7% with 1.67% and then do the simple calculation again as shown in example above to find the interest rate gain after the end of holding period. You will get RM 167/- as the answer.

CAN YOU NOTICE THE PLUNGE IN THE GAINED VALUE ?

This type of return is called the REAL RETURN of the saving's instrument.

Here's one more example for you :

Again, assume all data in this example remains same as in the example above, except the interest rate.
Principal = RM10000/-
FD Rate = 3.7%
Holding period = 1 year
As for the inflation rate, take 5% as this is more accurately reflects current Malaysia's CPI Index.

Can you compute the real return?

You will get RM 9876/- and this is a loss making investment.

This simply means that it is always not a good decision to keep in a savings instrument that bears an interest rate lower than the prevailing inflation rate!!
ALWAYS CHOOSE A PRODUCT THAT GENERATES INTEREST RATE FAR MORE THAN THE INFLATION RATE.
HAPPY SAVINGS!!