A whole new hot beginning!

To all my blog followers (if I have any registered or non-registered), the blog will undergo a total revamp and will relocate to a web address that will be announced very soon. Stay tuned!

How do Mutual Funds benefit the clueless?

After around 6 months of approaching potential clients, I'm vastly surprised by the amount of people who have not idea how mutual funds work. In regards to it, I've decided to post a brief summary of how mutual funds work and how the public can benefit from it.

Mutual funds are pools of money gathered from like-minded investors that have a mutual goal in mind - to earn more cash! After gathering a certain amount of funds, the fund manager will then invest them into equities, bonds, REITs, warrants, debentures, currencies and/or any form of investment. It will be baby-sitted by fund managers which will appropriate the funds based on market ups and downs and investor goals. To put it in a simpler way, Mutual Funds gather money from people who have no clue what to invest in and have no time to monitor their investments. They will then take that money, and invest it. At the end of the year (or month depending on how returns are calculated), returns or gains from these investments will then be distributed to the people who had put their money in the fund.

Benefit 1: Risk is spread out
Because Mutual Funds are pools of funds gathered, individual investors may not have to lose as much as putting their money in individual investments if the market goes downhill. This is because, considering the nature of how the funds were gathered (by multiple investors), the total gathered fund will also be invested in multiple investments, thus giving the investors a spread out risk. To illustrate this:-

Imagine a fund that invests in 5 different stocks named A, B, C, D and E. If Stock A, B and C went down but D and E went up, the investor who invested in the fund may still have a chance to break even. Now imagine if the investor chose to invest in only one stock, say A. If A went down, all his money will be devalued.

Benefit 2: Low cost of capital
Good stocks are expensive. Coincidentally they also give the best consistent return. But with Mutual Funds that are created specifically for blue chip stocks, investors do not need to fork out a huge sum of money to purchase many different blue chip stocks. They can just buy one fund that invests is many many many different blue chip stocks.

Benefit 3: Low cost of maintenance
Some investors may employ a method of investing called 'Dollar Cost Averaging (DCA)'. Now, every time an investor decides to top up their investment amount employing the DCA method, he/she only needs to pay 3-5% of service charge to their fund managers. On the other hand, stock brokers may charge commission based on transaction volume, withdrawals etc. Also, Mutual Funds may also give the investor the benefit of economies of scale because of the large sum of the fund where bulk discounts may be enjoyed.

Benefit 4: Low emotional cost
With mutual funds, investors do not need to wake up in cold sweat in the middle of the night worrying about their investments because they are all managed by certified professionals.

I can think of so many other benefits that will save you from premature hair loss. So tell me, if you're keen to invest but do not know how or what you need, why not try looking into Mutual Funds and see if it will work for you?

Shaun Ng
Signing Off =)

The Eighth Wonder of the World: Compounded Interest

Baron Rothchild once said "I've never seen all the seven wonders of the modern world but, I know what the Eighth Wonder of the Modern World is: Compounded Interest". Many of us have come across this term 'Compounded Interest' in financial periodicals, the newspapers or even in the world wide web. However, some of us might find the explanation vague as it is normally explained in tandem with an investment strategy/plan. It is a rudimentary concept, yes. However, it is an essential concept that one should understand before delving into the world of investing. I'm sure that many of us are led to believe that compounded interest is better than fixed interest and yes, it is true! An investment that promises compounded interest is a better investment than investments that promises fixed interest. Now, if you still have that nagging feeling about finding out why compounded interest is always good news, read on!

Fixed interest based upon principal means that interest is given based on the initial capital invested. To make things clearer, if a fund promises a fixed interest rate of 5% per annum and an investor invested say $1,000.00. After a year, his investment will grow to = $1,000.00 + ($1,000.00 X 5%) = $1,050.00. In simplicity, it simply means that the investment will only pay 5% of interest based on the initial investment amount which is $1,000.00 in this context.

Conversely, in a compounded interest scenario, during the the first year the growth will be same as the growth in a fixed interest fund. However, it is only after the subsequent years where the fun really starts! This is because interest is calculated on the current value of the fund (the total of initial investment sum and the interest earned in the previous years. Okay, this may look mind boggling so to make things clearer, lets assume the same amount was invested ($1,000.00) with a compounded interest of 5%:-

First Year
$1,000.00 + ($1,000.00 X 5%) = $1,050.00

Second Year
$1,050.00 + ($1,050.00 X 5%) = $1,102.50

Third Year
$1,102.50 + ($1,102.50 X 5%) = $1,157.63

See how the interest is calculated by totalling the initial investment amount with the interest earned in the previous period? Investments with compounded interest give returns based on the current value of your investment. Or in other words, interest upon interest! Now, lets compare between the two different interest policies:-

First Year
$1,000.00 + ($1,000.00 X 5%) = $1,050.00 <- Compounded Interest
$1,000.00 + ($1,000.00 X 5%) = $1,050.00 <- Fixed Interest

Second Year
$1,050.00 + ($1,050.00 X 5%) = $1,102.50 <- Compounded Interest
$1,050.00 + ($1,000.00 X 5%) = $1,100.00 <- Fixed Interest

Third Year
$1,102.50 + ($1,102.50 X 5%) = $1,157.63 <- Compounded Interest
$1,100.00 + ($1,000.00 X 5%) = $1,150.00 <- Fixed Interest

See the difference between both the investments? The investment that promised a compounded interest had given the investor $7.63 more. So now you finally know what compounded interest is really about, give those investments a check to see what kind of interest are they promising. Still find it difficult to understand? Drop me a comment and I will see what I can do to help.

Shaun Ng, Signing Off. =)

Zombie Cat has left for greener pastures

December 4th 2009 will always be remembered by me as the last day of employment in Deloitte Malaysia. Although I've made my speech during the lovely farewell dinner organized by my audit team I would like to express my heartfelt gratitude once again. Thank you for being great colleagues!

I have now started my new job as a business development associate for a private security/law enforcement practice and so far, everything has been going smooth. I've also got my agency license from the Federation of Investment Managers Malaysia and will be dealing in Unit Trusts. So, if you ever want to know more about unit trusts and how it may work for you, do not hesitate to contact me. Likewise, if you need any private security services you know who to call =).

Shaun Ng, Signing Off. =)

PS: I'm now working on a financial model pertaining to the compounded cash value over time so tune in for more updates!

Are REIT funds an alternative to property investment?

I'm pretty sure everyone has gotten the hype of investing in real estate. I'm also quite sure that some of us had been in this situation: We run home to check out potential purchases after hearing about how 'easy' it is to earn money from buying and selling properties only to be discouraged by the initial start up costs (downpayment, monthly instalments, lawyer fees etc.). The point is, good deals are everywhere, places like Ara Damansara and DesaPark City all promise good returns because they are well planned townships and have reputable developers. But how many of us can actually afford them? Allow me to illustrate briefly on what it takes to own a piece of HOT property.

Assuming your piece of property is RM470,000.00 and you plan to pay a 10% downpayment (RM47,000.00). For ease of calculation I will not include the lawyer and other miscellaneous fees. Also note that you will be paying off this loan for the maximum duration: 30 years and your interest rate imposed by the bank is 5%^ (this is hardly even close to what they're normally charging). This means, for 30 years, you will be paying RM2,271.00. Now tell me, who has an initial start up of RM47,000.00 and RM2,271.00 every month to spare? Not a whole lot of people, I say. Furthermore, investing in properties this way will not yield returns because of the borrowing costs - I will get to this in a different article in the not so distant future =).

If you want to jump into the real estate market but do not have the high initial start up capital there is actually an alternative. That alternative is REIT. REIT is the acronym for [R]eal [E]state [I]nvestment [T]rust. REITs were created because large corporations were aware that most of us do not have large initial capital. They are also aware of the risks involved should an individual investor decide to gobble up a piece of property by himself/herself only to end up having indigestion. However, when a few individual investors decide to pool their funds together, risk is spread out thinner. In summary, REIT is a fund pooled by a large amount of investors with a common goal in mind - to invest in properties. REITs invest not only in properties for capital gain but also for rental purposes eg: Starhill, The Curve and Various serviced residences.

Thanks to REIT managers, we can enjoy a low initial start up capital and increased savings via economies of scale. Cost benefits include a reduced tax rate on returns (assuming you have a property rented, rental income is taxed normally whereas most REIT returns are completely tax exempt or taxed at a maximum rate of 15%*) and stamp duty exemptions. Borrowing costs are also reduced because REITs are only allowed a maximum of 50% gearing (most REITs do not even have borrowings!).

We also gain an emotional advantage where we no longer need to deal with that obnoxious tenant that calls us 3am in the morning complaining about a plumbing problem! We also do not need to worry about liquidity because REITs can be bought or sold with only a day of delay** whereas properties may take a few months to sell.

In summary, when investing in REITs, we may:-

1. Enjoy a peace of mind - no more calls from that tenant complaining about toilet problems
2. Enjoy lower risk - giving members of the public a chance to invest in properties without taking an individual risk
3. Enjoy lower tax rates - Returns earned are predominantly tax exempt
4. Potentially enjoy higher returns - Due to the large amount of the fund, quality buildings can be invested in***
5. Enjoy better liquidity - as REIT funds can be disposed easily and quickly in times of urgency

Shaun Ng, Signing Off. =)

^Based on the average borrowing rate of major banks in Malaysia for a 30 year housing loan
*The Star
**Depends on the engaged fund manager, may vary
***Axis REIT paid an annual dividend of 10.36% for the year ended 31.12.2006