On the table we can see the basic forms of investments which most people have, starting with the savings account which is barely an investment and is more for liquidity – cash on hand whenever you need it. Naturally, it then progresses to FD, which is the fixed deposit where there is a 3.15% per annum. Credit investors are ready to lock in your money. EPF is provided to working employees as a form of retirement planning. From EPF you can earn 4-6% per annum in recent years. Unit trusts, meanwhile, could actually yield you with potentially higher returns, and they have no lock-in periods. Unit trusts range from low to high risk. Other investment options include a wide variety of money markets, bonds, stocks, property, and REITs, to name a few.
What are unit trusts? Where do they stand among all these instruments? A unit trust is a portfolio that invests into all the investment instruments I mentioned. Basically, it is a basket of stocks or equity funds, bond funds that invest in corporate bonds, money market funds which invest into the money instruments, REIT funds, and property funds. It is well diversified locally and globally. You may a piece of U.S., Europe, or China by investing into unit trusts. It is managed by professional fund managers from top fund houses in Malaysia or foreign fund managers. What I mean by foreign fund managers is that this manager is managing from abroad in foreign markets which are being sold in Malaysia and carried by the local fund house.
Going on to the types of unit trusts on the market, there are five categories, and you can also find this information in your fund selecter tool at fundsupermart.com. There is the equity market, the balanced market, the fixed income market, the money market, and alternative investments. What do we mean by all these different types of categories? You can see that this money market fund has a risk rating from 0-1. So it is not very risky to put your money into the money market funds. The reason being, it is very low on volatility, the money will just be put in there to grow. You have the domestic fixed income funds, meaning this money is being invested domestically. The risk rating is from 1-4.
All the funds can invest into different geographical locations. Just because you are in Malaysia doesn’t mean that you should be constrained to invest in the home market. You can, of course, but you can also open up your options to investing into Asean, Asia (including/excluding Japan), and Australia, to name a few.
How to Choose the Right Unit Trust Fund
Now comes the most important question. With so many concentrations, how can I invest and choose the right fund? Firstly, understand how much risk you can stomach. Secondly, you should create and maintain an investment portfolio. What we mean by investment portfolio is you can have more than one fund from the same geographical location or fund category. This means if you have a unit trust where you invest in China, for example, you can buy 5000 units in China and you can also be allocating another 5000 to maybe Indonesia, and another 5000 into a fixed income fund which is not very risky. This is what we mean by a portfolio. Thirdly, you should set the comfortable investment horizon for yourself. Unit trusts usually invest in wall street for five years. I would be lying to you if I told you that you should by unit trusts and then sell them off without keeping it for very long or that you could get a very big profit within a short period of time. Unit trusts are a long term inv estment and is for investors who believe in keeping their money inside and letting it grow, let it ride through the normal economic cycle. There are good times and bad times, of course, and when you have hit your target return you can sell you funds. This brings us to my last point, that you have to set your expectations to match the portfolio performance.
Conservative Unit Trust Portfolio
There is a portfolio for everyone. We start with a conservative portfolio. What is a conservative portfolio? You have 90% of your money in fixed income and only 10% in equity. If you invest RM10000, for example, you should have RM9000 in fixed income and only RM1000 in equity. It gives a very slow but steady return. What we mean by a steady return is that it’s stable, it’s low risk, and you do not need to manage it actively. You will be keeping this portfolio for at least three years or more.
Moderately Conservative Unit Trust Portfolio
Next we have the moderately conservative portfolio. For the moderately conservative portfolio we invest 70% in fixed income and 30% into equity. For the 70% into fixed income, again with the example of RM10,000 is RM7,000 and another RM3000 into the equity fund. This shouldn’t be a problem because for most of the unit trusts in Malaysia the investment amount starts with RM1000. This portfolio can give you reasonably good returns and is for investors who are able to bear a little bit of risk. This is a medium to long-term portfolio and you should be able to stay here for three years or more.
Lastly we have the aggressive portfolio. It is not for the faint hearted, but if you are able to stomach the volatility that goes on in the market with all the ups and downs, you should be able to have an aggressive portfolio. You invest into global, regional, or single country equity. It has high risk and with high risk you are able to generate higher return. The investment horizon you are looking at is maybe 10 years or more. Most of the listeners out there are thinking, “10 years!? I mean, I’m putting my money in there for 10 years? How much return do I expect to have? First and foremost, of course, you will be wanting to beat inflation. Secondly, the purpose of the portfolio is to plan for your retirement, or you could be planning for your children’s education, planning for your new house, or anything like that. 5 years should be a very good time for you to keep your portfolio.
How can one invest into unit trusts? Say you are interested in having this portfolio, you can invest in a lump sum investment by cash or check. You can also invest using your EPF or you can invest periodically using the regular saving plan. Most investors are reluctant to reconsider their EPF for investment purposes and are content with the dividend yield.
The dividend yield which is given for this past year’s annualized return was a 6% dividend, but if you had taken that money and invested it in unit trusts you could have made 18.33%. This unit trust we are using as an example was taken from a Malaysian unit trust. The EPF does not allow its members to take out their money; the unit trust is invested in to foreign markets, so you have to be investing into malaysian unit trusts.
Even Malaysian unit trusts can give you 18.33% for the year of 2011. Meanwhile, for a three year annualized return, from 2008 to 2011, the unit trust can give 28.48% return. This is annualized, so every year you are getting 28.48%. That is compared to the EPF’s interest of 4.75% on this graph.
A lot of investors are reluctant to give up their EPF for investment purposes. They are content with the dividend yield, but if you take away the erosion of inflation you may be left with little of the dividend.
The EPF body has allowed its investors to withdraw some savings from account one for unit trust investments. Is it worth it? If you judge from this slide, I think you can see that since the money is in there for the long run, perhaps you can pick it up and make your money work harder for you.
You can use this for investment. So, actually, its not the entire 50,000 that you can pick up and invest. It is the 6,400 which you can invest and it will generate 28% return for you over a year. Why not take a little bit out? Ask for it and take out your money to invest. When you settle this investment it eventually goes back to your EPF as well.
Investing in both good and bad times: To invest in regular timing means to avoid market timing. You should be disciplined to invest consistantly regardless of market conditions. As we look at this chart, how many of you have experienced this before or have already seen this chart?
The point of euphoria is at the top of market. Usually investors feel great and it is usually the time that they buy more. When it goes down to a point of maximum financial opportunity at the bottom you have depression. Investors will usually think, “Maybe the market is not for me. You can see this is a cycle that repeats itself. When it is going up you want to ride on the optimism and you want to invest more. But during that time it is not a very good time to invest.
If you want to be an investor in both good and bad times, you have to avoid timing the market, talking about unit trusts. For stocks you have to try to time the market but to know if your time is correct or not, it depends. You need discipline to invest consistently and to not be overcome by your emotions. You need to choose the undervalued market. I’ll quickly explained what an undervalued market is, and you can also refer to our reccomended funds for fund ideas.
This is a monthly subscription plan which instills discipline to the investor and it is a based on automatic deduction. There are no additional fees for this. With this the investor can also avoid the market timing and not be overcome by the emotion of investing. Every month there is a dedicated amount to be put into the specific fund that you like; it can be any fund. It gets rid of the hastle for you because you don’t need to manually put in an order and make the payment. This is about investing discipline.
Make profit by investing in the under-valued market
I mentioned to choose the undervalued markets. Over here we have the greater China market, and also the emerging markets. Why is it so? If you look at this chart, it is actually for greater China. Greater China consists of China, Hong Kong, and Tiawan. For year 2012 we have PE, which is the price ending ratio of any investment or primary you look at. Estimated PE is what is being calculated now, what is happening now, and the fair PE is what it should be at. There is a lot of potential for these countries that they are not reaching yet. You can see for the year 2012, China. for example, had an estimated PE of 9x, but in fact we think a fair PE should be at least 14x.
Any difference between the 9x PE and the 14x PE is a discount. What we mean by discount is that you are investing into this cheap market, which has more potential than where it has come. Upset potential ranges from 43.6% for Tiawan and 32.3% for Hong Kong to 45.2 for China by the end of 2013. China’s economy is e xpected to grow by an estimated 8.25% to 8.5% in 2012 and 2013. So their growth is expected to be faster than any developed market.
There are probably already a lto of people out there saying that China is good for investment, but some of our listeners who may have China funds may feel not so because maybe their China fund is now showing negetive returns. Given the current market condition, I would like to ask, there are a lot of other countries giving a negative return but when we revisit the chart that I showed just now, does this mean that there is no room for investment? We don’t know if it has hit the bottom yet, but at least according to our PE calculations these are actually cheap markets with good value that you can consider investing into.
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