Nurture The Habit of Investing

Remember the day when we were given our first piggy bank and the joy we had putting our first coin/bill into it? Somehow when we grow up, we seem to forget the joy of savings and instead commit easily to debts:

"I have to own this phone even by using my future credit"
"I can afford this dream car by extending the loan tenure to 9 years"
"I don't mind bearing my housing loan for 30 years"
"I have no problem financing my luxury lifestyle with my credit cards"

Don't they sound familiar?

But when it comes to savings and investing, here we are:

"I earn too little to save"
"I will only start investing when my salary hits RM xxx"
"I have no money"
"I will start next year" (and of course "next year" again when next year came)

Investing is like any other habit - it is easy to start but difficult to follow through; it needs discipline and consistency.

You don't have to start with a lot in your first investment; in unit trust, you may just start with minimum initial investment of RM1000 and regular savings of RM 100! To maintain the consistency, it is recommended to set aside 10% of you monthly income for regular saving. From each paycheck, immediately transfer 10% of your earnings over to your auto-debit investment account.

As your income grows, you can always review your investment plan and adjust according to your objective.

So stop giving excuses and start your investment now!!

How to avoid losing money in unit trust investment?

There are few golden rules in avoiding losing money in unit trust investment:

1) Don't invest borrowed money

When you borrow money to invest in unit trust, you lose the control of how long you can stay in the investment! For instance if you borrowed money from bank, hike in interest rate might force you to sell off your investment prematurely if you can't afford the monthly loan repayment.

2) Only use money that you can put aside for 3 - 5 years

Besides allocating money for investment, make sure you reserve some for emergency use! So that during emergency, you will not be forced to redeem your investment when the market is down.

3) Don't let short term fluctuations discourage you

When market is fluctuated, practive switching or dollar cost averaging! Remember your investment objective!

4) When your planned investment term comes to a close, start selling your units gradually and in good time

Don't be greedy! Start selling your units gradually when market is good and the total investment is meeting your objective. You won't want to regret when the opportunity is passed, and you realize you have to delay your retirement plan or worse still your kids education plan till the market rebounded.

Key Changes Made in EPF (4)

I. TOP – UP SAVINGS IN ACCOUNT 1


Objective:

• To increase members retirement savings and to strengthen family values.

Children may top up parents’ savings.

Members’ spouses may top up each other’s savings.

Top up of savings can be continued until a member attains age 55 years.


J. MATRIMONIAL PROPERTY CLAIM ON SAVINGS OF NON MUSLIM MEMBERS

The amount of claim against member’s EPF savings brought about by way of a Court Order shall be paid to the claimant upon the claimant reaching age 55 years.

Not applicable to Muslim members following a Fatwa (Islamic religious decree) that the EPF savings is not a matrimonial property.


K. MANDATORY FOR LARGE EMPLOYERS TO CONTRIBUTE VIA ELECTRONIC MODE

Objective:

• To encourage large employers to contribute electronically as it is cost - effective, speedier and minimizes payment errors.

Will be made mandatory in phases starting with employers with 1000 and more employees.

In the meanwhile, the other employers may continue to make payments using the usual mode. However, they are encouraged to switch to the electronic payment mode.

Any employer who has been required mandatory to use the electronic mode but fail to do so shall be fined. The amount to be determined.


L. CHANGES TO AGE 50 WITHDRAWAL

Objective:

• To ensure that members have at least RM120,000 at age 55 to sustain through their retirement.

Members who have the basic savings in Account 1 may withdraw their savings in Account 2.

Members who do not have the basic savings in Account 1 must meet the requirement before they can be allowed to withdraw savings in Account 2.

Key Changes Made in EPF (3)

G. CONTRIBUTION

I) EXTENSION OF LIABILITY TO CONTRIBUTE FROM AGE 55 TO 75 YEARS

Objective:

• To encourage members to continue to work after 55 years to enhance their retirement savings.
• Employees are liable to contribute to EPF up to age 75 years.

Before 1 February 2008:

Upon full withdrawal, employees cease liability to contribute but may elect to contribute.


II) TWO TIER CONTRIBUTION RATES

Objective:

• To encourage continued employment for employees after age 55 and avoid burdening employers and employees with high contribution rate.

Employees below age 55 years:

• 11% by employees and 12% by employers.

Employees from age 55 years to 75 years:

• 50% of statutory rate of contribution of employees below age 55 ( 5.5 % by employees and 6% by employers)

Note:

Voluntary contribution: Self-employed and others (Minimum RM50 & Maximum RM5,000).

Contribute in excess of statutory rate: employees or employers or both may choose to contribute in excess of 23% monthly.


III) DIVIDEND PAYMENT UP TO AGE 75 YEARS

Objective:

• To encourage members after 75 years to withdraw their savings.

Savings not withdrawn after age 75 years shall be transferred to the Registrar of Unclaimed Monies after 5 years, that is, at age 80.

Before 1 February 2008:

• Dividend paid on all savings managed by the EPF
• Savings not withdrawn will remain with the EPF.

H. CRITICAL ILLNESS INSURANCE POLICY WITHDRAWAL

Objective:

• To provide some insurance protection for critical illness.

A member can withdraw savings from Account 2 to purchase a Critical Illness Insurance Policy for himself and immediate family members through the Critical Illness Insurance Policy Withdrawals scheme.

Key Changes Made in EPF (2)

E. HOUSING LOAN MONTHLY INSTALMENT WITHDRAWAL

Objective:

• Help members to pay their housing loan installment.

A member may withdraw their Account 2 savings for this purpose whereupon payment will be credited directly into member’s bank account.

Note:

Changes introduced since 3 April 2006:

• Yearly withdrawal to reduce housing loan whereupon payment is made to members’ housing loan account.
• Spouses who are not joint – owners of property allowed to withdraw their savings from Account 2 to help reduce their spouses’ housing loan.

F. RESTRUCTURING MEMBER'S INVESTMENT CHOICE

Objective

• To allow members at various age levels to invest part of their savings to enhance their retirement savings.

Members may invest 20% of savings in excess of the ‘basic saving’ in Account 1 in approved investments through approved institutions.

Investments in approved institutions shall be deemed withdrawn when a member attains age 55 years, even if he/she has not made full withdrawal. (1September 2007).

Before 1 February 2008:

• Members can invest 20% of savings in excess of RM50,000 in Account 1 through approved External Fund Managers.
• Savings transferred for investments shall be returned to the EPF upon liquidation of investment if members had not withdrawn at age 55 years.

“BASIC SAVING”

Objective:

• A certain amount of savings in Account 1 at various pre-determined age so as to enable a member to accumulate a minimum savings of RM120,000 at age 55 years.

This amount would give a member a payment of RM500 a month for a period of 20 years (55 - 75 years).

This amount shall not be withdrawn before age 55 years.

This amount will be savings in cash with the EPF.

The quantum of basic savings will be reviewed every five years.







A member need to have the required amount of savings at the predetermined age levels. Amount in excess of the ‘basic sum’ can be invested in approved investments through approved Institutions.

Key Changes Made in EPF (1)

A. RESTRUCTURING OF MEMBERS’ ACCOUNT



Note : - On 1 January 2007, members savings in Account 3 was transferred to Account 2 - New contributions received after 1.1.2007 will be apportioned 70% into Account 1 and 30% into Account 2

B. FLEXIBLE AGE 55 YEARS WITHDRAWAL

Objective:

• To encourage members after 55 years to withdraw their savings periodically over a longer period.

Introduce flexible withdrawal options:

• Lump sum
• Monthly Payment (Minimum RM250 for a period not less than one(1) year)
• Withdrawal at anytime subject to a minimum amount of RM2,000 at intervals of, at least, 30 days

Members may purchase an Annuity, Private Pension or invest in other approved investments.

(Members may choose any one or more of the payment options stated above).

C. WITHDRAWAL OF SAVINGS IN EXCESS OF RM 1 MILLION

Objective:

• To encourage members’ with excess savings to invest part of their savings on their own.

A member whose savings has exceeded RM1million can withdraw the amount in excess of RM1 million at any time subject to a minimum withdrawal amount of RM100,000.00 every three(3) months.


D. ADMINISTRATIVE STREAMLINE








* Presently no duration.

** General penalty – 3- year imprisonment @ fine not exceeding RM10,000 @ both.

Disadvantages of Unit Trust Scheme - How to mitigate them

I always believe that it is fair to my clients that they understand the disadvantages of unit trust scheme before making their decision in investing in it. It may sound idiotic not to downplay the bad sides of it, but I'm confident that after I walk thru with them on how to mitigate such disadvantages, they will indeed see some of them as advantages..:)

1) Fluctuation in total return of investment

For equity UTS, the movement of share prices in the stock market is reflected in the NAV of the UTS. As these vary, so prices of units in the UTS can go down as well as up.

Mitigation:

While it makes sense to leave the investment grow while market is up, it is crucial to practice switching and DCA when market is going downhill.

It is recommended to switch existing equity funds to bond to prevent depreciation of investment when stock market is bearish. Bonds tend to perform better when stock market is down and it is one of the lower risk type of fund in UTS.

As for new investment, DCA is the best way to accumulate units when fund prices are falling; hold them till market rebounded, one can sure make a handsome return.


2) Loss of control

Investors in UTS lose the right to direct how their savings are invested to fund managers. If UTMC fund managers invest UTS investment portfolios in accordance with the prospectus and deed, there is little that the unit holders can do if they disagree with the investment decisions made by the fund manager.

Mitigation:

Is that really an disadvantage of having professionals managing your money? How often have you or people around you made money by investing directly into stock market? Rarely I guess.

3) Fees and charges

The services provided by UTMC are not without cost. Hence there are fees and charges payable by investors in UTS. The 2 main charges are Initial Service Charge and Annual Maintenance Fee.

Mitigation:

While Annual Maintenance Fee is charged annually, Initial Service Charge would only be charged once when UTC investment is made. Since it is always recommended to stay at least 3-5 years in UTC investment, the cost would be very likely absorbed by the total return of the investment.

Try to avoid redeeming the investment if not necessary as re-investment will incur another round of Initial Service Charge; should you want to safeguard your investment when market is down or realize the profit, you may just park it into bond funds.

4) Opportunity cost

As with any decision, an investor who invests in UTS may have produced better returns by investing directly in the markets. This excess represents the 'opportunity cost' of investing in UTS.

Mitigation:

Refer to item (2).