LCF on Personal Finance: Malaysia

Blog moved to: howtofinancemoney.com

noreply@blogger.com (LCF) — Sun, 08 Jan 2012 07:56:00 +0000

The new URL for LCF on Personal Finance is at howtofinancemoney.com

LCF on Personal Finance featured comments in Personal Money magazine, twice!

noreply@blogger.com (LCF) — Sat, 10 Dec 2011 09:13:00 +0000

Here's the November 2011 issue of Personal Money Letters to the Editor

And here's the December 2011 issue.

The 4th & Perhaps the Most Important Question to Ask an UTC before you Invest in Unit Trust

noreply@blogger.com (LCF) — Sun, 04 Dec 2011 16:19:00 +0000

I previously suggested 3 basic, must-ask questions for a unit trust consultant whom engages you for investment products sale.

Before continuing to read further, you need to realize that any investment carries its own unique risk. If you are not at this stage yet, then you will always look for a guarantee before putting your money into any investment vehicle. It is true that FD returns are guaranteed*, but no one ever got successful in wealth accumulation by putting money in FD alone. Prudent investment decision is about minimizing the risk of monetary losses, not by avoiding the risk.

We always blame financial agents for their promises made on the investment returns which cannot be fulfilled. I am starting to think that agents are unintentionally and indirectly "coerced" into giving the misleading info in their sales pitch due to the the fact that people always want a guarantee in any investment. In other words, it could be our own's doing! Of course, given the fact that the agent whom you are dealing with is a competent UTC, not purely a sales guy focusing solely on meeting his sales quota.

The Agent's side of the Story

Even if you are an honest man trying to make a living by working as an insurance intermediaries or UTC, you will face a problem if 9 out of your 10 clients require a guarantee on their investment return before committing their money. You will be in a dilemma. No way you can convince your client to invest his/her money with you if you disclose all the risks involved. Asking your client the amount of money he can afford to lose to judge his risk appetite (before recommending the appropriate unit trust class) is NOT going to help you close the deal. This is a classic Catch 22 scenario - you client demands high returns, yet he also needs a guarantee not to lose ANY money.

That's totally absurd.

So what would you do?

In selling investment products, you probably have downplayed the risk involved, and highlighted the potential returns - which was what the client wanted to hear. 2 years down the road, during a downturn in business cycle, you client questioned you when his portfolio shrunk. He accused you of being incompetent or worst, deceitful. It's a lose-lose situation, your client is now upset because he loses money, while your reputation goes down the drain. Although this seemed like your own doing, it is not. The real root cause is that the "irrational" public wants an investment which yields high return with zero risk factor. In my mind, there is only one scheme fits this description - Ponzi scheme or the Bestino Golden House Gold Scam.

The Investors' side of the Story
The win-win solution to this, from buyers' perspective.

Ask your financial agent if he invests his own money into any fund he is recommending to you. And ask him WHY.

A good financial agent who has his own money invested in means he believes in what he is selling. It is probable that he has done the due diligence himself. I will ditch the financial agent if he does not walk the walk. Ask him to show you how much he's invested in any of funds for the UTMC he is representing. Well, it's true that he is not obliged to disclose his whole investment portfolio but I am not asking too much here - just the specific fund(s) he is proposing to you, not his whole portfolio. What if he still refuses? Well, don't you get suspicious if a financial agent's money is not into any funds he is recommending to you? That is akin to a chef not eating his own cooking. It's disturbing. Disappointing, to say the least.

What are your opinions, readers?

A little disclaimer here, I am a UTC of OSK-UOB Investment Management Berhad. However, I am not actively prospecting; as the initial reason I became one is getting a 20% discount off my CFP course lecture and exam fees. I only channeled my own EPF savings into Kidsave Trust, a Balanced Fund for upfront fees of 1.35% which is even lower than Fundsupermart. Kidsave Trust is one of the fund with relatively strong performance, high resilience and low expense ratio. It is on FundSupermart recommended list.

*Fixed Deposits are guaranteed by PIDM (Perbadanan Insurans Deposit Malaysia), up to RM 250k. Unit trusts are not. So what makes you think anyone can guarantee you a return even in the lowest risk unit trust fund?

What You Are Actually Investing in a Fixed Income Fund.

noreply@blogger.com (LCF) — Tue, 29 Nov 2011 14:22:00 +0000

Fixed income fund is touted as the safest asset class in unit trust investment. However, is it as safe as fixed deposit?

NO.

Fixed income funds invest in government and corporate bonds. I previously wrote about bond and how bond prices affect you bond fund NAV as it fluctuates according to business cycle. This is systematic risk, which is inherent to the entire market. You cannot control this but the good thing is, it is somewhat predictable to certain extent. You just know that a recession is looming in the horizon by looking at the various economic indicators.

Unsystematic risk, on the other hand, is the investment risk which is specific to a fund only. The more difficult risk to predict in a bond fund is the risk of default. It is like, I sell you bond, which is akin to me borrowing money from you. Suddenly, I go bankrupt and cannot repay your money.

Fixed income fund normally holds a portfolio of government and corporate bonds. Imagine that if the bond fund you were invested in holds government bond of Greece. Your money will go down the drain.

Corporations also issue bonds besides shares. However, if the company business takes a turn for the worse for an extended period of time and keeps on borrowing money until its cash flow become negative, it will go bankrupt eventually. When it no longer able to fulfil its financial obligations to its creditors and bond holders, it is said to be in default state.

Investors of RHB Islamic Bond fund recently encountered such unfortunate incident in Oct 2011. This occurred when a corporate bond in its portfolio defaulted. Read my previous post about an event case study on how fixed income fund is not as risk-less as you previously thought.

Watch out intently for the risk of default in the fund's bond portfolio. There's no short cut to this simple tip: Read its annual and interim reports for all the bonds' rating in its portfolio. I smell a rat if any of the bonds in a fund portfolio gets downgraded to junk bond grade.

Cheers
LCF on Personal Finance Malaysia

LCF Answers Readers' Question

noreply@blogger.com (LCF) — Sun, 27 Nov 2011 15:59:00 +0000

Question 1
In my previous post on calculating total insurance needs, a reader remarked that by liquidating all Mr Lim's assets, it essentially means there is neither a house nor liquid cash for his family to stay and use after his death.

This is correct. Therefore, if Mr Lim does not want the house to be sold and wants his wife to still have liquid cash in the bank upon his demise, he should omit both his house market value and cash from total assets computation.

Therefore, total assets available to settle his current liabilities is now equivalent to $ (890k - 500k - 10k) = $ 380k.

His insurance needs to cover for the shortfall is now equivalent to $ (1210k - 380k) = $ 830k.

Question 2
Using Internal Rate of Return to evaluate an annuity plan is the right way to know your effective annual return.
However, when it comes to endowment plan (whose popularity is overshadowed by unit trust nowadays), you do not need to use IRR to calculate the return. It is actually a lot simpler.

Assume a 20 years endowment plan, with guaranteed maturity sum of $ 100k. The annual premium is $ 4k, to be paid at the beginning of every year.
All you need to do is to use the RATE formula and key in the values as below:

=RATE(20,-4000,0,100000,1)

Your ROI is 2.08%.

Use IRR formula only if there are series of uneven cash inflows and outflows.
For endowment plan, there is a series of even cash outflows and only single cash inflow at the end of the period. Therefore, use the RATE formula instead.

I hope this helps. :)

Cheers,
LCF on Personal Finance Malaysia

A Convenient Way to Check Insurance Policy Cash Value

noreply@blogger.com (LCF) — Wed, 23 Nov 2011 15:32:00 +0000

e-Connect is Great Eastern web-based service for policyholders. With e-Connect, you can:

• View and download your Life Insurance Premium Certificate(LAPC)

• Check your policy details and values

• Download form for transactions

• View Investment Link Annual Report

Steps to sign up as user

Step 1: Go to Great Eastern e-Connect Portal and click Sign Up Now.

Step 2: Read the terms and conditions, and click Submit

Step 3: Fill up the registration form. Your registration is successful only if you see a message telling you that your password will be sent to you within 7 working days.

Step 4: Retrieve your 8 digits password once you receive the slip. You will be prompted to change your password.

Step 5: Under the tab "My Policies", you should see all the policies under your name.

Click on the policy number and a new pop up window will show you all the static info (policy status and benefits, premium, sum assured, beneficiary, agent name, etc) and dynamic info (policy values).

Dynamic info is of more interest to us.

For Traditional Whole Life Policy, you can check your policy surrender value. Here, SA, RB and TB means Sum Assured, Reversionary Bonus and Terminal Bonus respectively.

Reversionary bonus refers to bonus added to the sum assured of a life assurance policy out of a life company surplus profits usually on an annual basis. These bonuses are payable at the end of the term of the policy (that is, at maturity), or on prior death of the life assured. Once allocated, their values are guaranteed provided premiums are paid up to maturity or death.

Terminal bonus is bonus received upon maturity of the policy.

For Net Policy Loan value details, you can go to GE FAQ section . Basically, this is the lump sum amount you can cash out now and repay at a later date with interest charge.

Now, for ILP, the item of interest is the fund details you are currently enrolled in and current investment value. This is similar to unit trust investment - it details the number of units you own and the NAV price.

Mine's invested in Lion Strategic Fund, managed by GE own fund manager. According to Lipper Leaders rating, it is a 5 star fund in terms of returns and consistency so far.

Readers, have you reviewed your policy lately?

*I own 2 GE policies, therefore this is the example I can share.You may have a similar system for your insurance provider; please check with them.

How to Evaluate Retirement Annuity Plan

noreply@blogger.com (LCF) — Mon, 21 Nov 2011 14:16:00 +0000

Retirement planning is one of the often overlooked aspect in personal finance. By the time one realizes the significance of a retirement plan, he usually discovers that there are only a few years left to retirement age. The primary focus for the years which has passed by had been on children education fund and settlement of debts or mortgage.

In budget 2012, there is this new RM 3,000 tax relief (previously RM 1,000) on contributions to private retirement scheme and insurance annuity for 10 years. This tax relief shows that the government started to recognize the importance of insurance annuity as retirement income because lump sum retirement savings such as EPF, more often that not, gets exhausted too soon.

There are certainly hybrids of insurance plus retirement savings plan in the market, but pure insurance annuity plans are certainly not very popular here. However, with this tax relief, banks or insurance companies might come up with new structured products to offer to customers.

A friend of mine went to her bank recently. This is what the financial advisor proposed to her:

Contribute RM 500 per month for 15 years, and then from 16th years onwards, get paid RM 4,000 annually until age 75, with additional guaranteed maturity bonus of RM 73,000.

The plan is also pretty "inflexible" as you are not allowed "redeem" your paid premium for the first 15 years in case of any financial emergency.

It is likely that most people will adopt a simplistic approach to calculate the return of this retirement annuity plan, assuming current age is 30 years.

Disregarding the time value of money, for a total invested amount of RM (500 x 12 x 15) = RM 90,000, you get back RM (4,000 x 30 + 73,000) = RM 193,000. Your response: 90k over 193k is a 46.6% return!

Yes, 46.6% return in 45 years. You got to be kidding me.

Here's the correct way to calculate your return for this type of deferred annuity, using Internal Rate of Return (IRR) in Microsoft Excel. I will guide you through step by step.

a) Type "n-th Year" in Column A, Row 1.

b) Type "Cash Flow" in Column B, Row 1.

c) Enter "1" in Column A, Row 2.

d) Enter "2" in Column A, Row 2 and all the way to "45".

e) Enter "-6000" in Column B, Row 2 and all the way till Row 16.

f) Enter "4000" in Column B, Row 17 and all the way till "n-th Year" equates "45"

It should look something like the table on the left.

In any empty cell, type this formula: "=IRR(B2:B46,0.03)"

Select this cell, right click > "Format Cells..." > "Number" tab > "Percentage"
Change decimal places to "2"

You should get IRR = 2.89%

This means, the annualized effective compounded interest rate of return of this plan over the 45 years period is 2.89%.

Another way to put it:
The return per annum of your total cash inflows over your total cash outflows is 2.89 percent.

Ponder over this alternative:
The monetary return will be more than the aforementioned annuity plan if today, a risk averse person locks RM 90,000 into a FD account with a constant interest rate of 3% for the next 45 years.

Dear readers,
Do you think that annuity plans are for those who are not sufficiently disciplined to manage their own expenses and investment?
If you have similar plan being offered to you by your insurance agent or banks, do let me know the details by leaving a comment below or at my Facebook page. We can analyze your case for the benefit of the masses.

Of Credit Card Limits and Malaysian spending habits

noreply@blogger.com (LCF) — Thu, 17 Nov 2011 16:02:00 +0000

Starting Jan 2012, Bank Negara will impose new rules to credit card usage. This is to manage the debt of credit cardholders earning RM36,000 and below per annum.

Below are the rules:

The maximum credit limit extended to a principal card holder in that category cannot exceed twice the holder's monthly income (RM3,000 x 2) per credit card issuer.

They will only be allowed to be a principal card holder from a maximum of two credit card issuers. Combined credit limit will be capped at RM12,000.

They have 24 months to repay the outstanding balances on their cancelled credit cards, if they have more than 2 cards.

The rationale of this: Fomca statistics showed that there are 1.92 million credit cardholders in the country who earn an annual income of less than RM36,000 but owing a staggering RM24bil to issuers.

WHY?
Apparently, people overspend in an increasingly materialistic society. Most advertising was aimed at promoting high-end lifestyles and this created pressure on young people to buy things just so they would appear “cool” or “trendy".

Here are the excerpts from TheStar

Fomca chief executive officer Datuk Paul Selvarajj said Fomca had recently conducted a national survey on young workers' financial behaviour and habits. Preliminary findings revealed that more than 60% were in debt, totalling about 15% of their income.

Here are what he emphasized:

Proper financial education was important to address the debt problem.

Financial education should be made mandatory at every level.

People need to have the right skills, knowledge and attitude to help them manage their finances.

They need to start thinking about saving for the future.

Psychologist and Dean of the Faculty of Behavioural Sciences at HELP University College, Dr Goh Chee Leong said people associated owning material goods with happiness and this was a major reason why they did not live within their means.

His quotes:

“Many young working adults nowadays are afraid to be seen as falling behind with trends. They end up buying things they don't want just to conform.”

**************

Insurance nominee or beneficiary?

noreply@blogger.com (LCF) — Wed, 16 Nov 2011 15:42:00 +0000

As a general rule, all your assets will be frozen when you die. With or without a will, your assets will be used to pay off creditors' claim and outstanding taxes before the leftover is being distributed to your family.

I guess by now everyone knows that only insurance proceeds and EPF balance are the 2 types of funds which will be paid directly to your nominee or beneficiary upon one's demise. These are said to be protected from creditors' claim even though a person is declared bankrupt prior to his death.

One thing you notice is that the terms beneficiary and nominee are always being used interchangeably.

In the context of EPF, they are the same. Your nominee is your beneficiary.

In life and personal accident insurance context, however, they are NOT. The following info are quoted and simplified from Section 166 of the Insurance Act.

Nominee is the person who will receive the money should you die. However, whether the nominee can use the insurance proceeds very much depends on your relationship with the nominee.

If you are not married, your parents is your legal beneficiary. If your nominee is your parents, then your parents can use the death claim proceeds. If your nominee is not your parents, then he or she can only act as an executor who temporarily manages the money instead having the legal right to use the money.

If you are married, your spouse and your children (in that order) are your legal beneficiaries. If you nominate them in your policy, then they can use the death claim proceeds. If your nominee is not your spouse or children, then he or she can only act as an executor who manages the money (settling debt, taxes, etc) before distributing it to your legal beneficiaries.

In the event of non-nomination, the distribution of insurance proceeds will be according your your will or according to the Distribution Act if you die without leaving a will.

A good insurance agent will always make sure you name your nominee. Contact your agent today if you did not fill in the nomination section previously, especially if you are married with dependants. This is important so that your spouse/children/parents will receive the money directly and thus avoiding that sum of money from going into your estate (subject to creditors' claim).

Bear in mind that the above is only applicable for non-Muslim.

For Muslim, these rules apply:

The nominee irrespective of relationship can only receive the policy moneys as an executor

The policy moneys must be distributed according to Islamic Faraid laws.

Muslims do not buy conventional insurance contracts because of the elements of uncertainty, gambling and interest. A special insurance arrangement known as Takaful is used in compliance with Syariah principles.

Top 10 Reasons I Invest in Capital Malls Malaysia Trust

noreply@blogger.com (LCF) — Sun, 13 Nov 2011 16:12:00 +0000

The thing about Penang properties: the rentals are (relatively) cheap compared to their (speculative?heh) values. Absolutely absurd when it comes to the soaring properties price for the past 3 years. Bear in mind properties investment is illiquid, and huge upfront capital is required. And there's always hassle of managing your properties unless you are full time into properties investment. Another rule of thumb is a return of at least 6 percent per annum rental yield, else experts say it is just not worth the trouble.

So I recently started to invest in Real Estate Properties Trust (REIT). Capital Malls Malaysia Trust (CMMT) to be exact. Consider REITs as the unit trust in commercial/residential properties which trade on the stock exchange. Here are the top 10 reasons why I see potential in Malaysia's largest pure-play shopping mall REIT for long term holdings and dividend income. I thought it as a good way to balance the risk and return with regard to my US stocks portfolio.

1. Three iconic shopping malls
Its main portfolio includes Gurney Plaza, largest mall in the northern region. The other two are The Mines Seri Kembangan and Sungai Wang Plaza Kuala Lumpur.

2. High occupancy rate
Average occupancy rate of 98.7% for all malls as of 3Q 2011 financial results. Rule of thumb, minimum 70%.

3. Above average tenancy lease
More than 60% of the total tenancy leases will only expire in 2 years or more as of 30 Sept 2011. (longer the better).

4. I shop there (Gurney Plaza)
Like at least once every month. So I know from first hand experience if the shoppers or vehicular traffic is increasing or decreasing. Okay, pretty dumb statement. Reminder to self again : leave early before 10 pm if it's Saturday night to avoid the absolutely ridiculous congestion.

5. Gurney Plaza extensive expansion
Subway. Mommy Wang. Old Town White coffee. Etude House. Don't we have enough of these already?
Apparently not. New wing 5th and 6th floor expansion; coming soon to you with more ways you can part with your money. :)
Also other AEI (Asset Enhancement Initiatives) this year on the parking lots. Each lot has this nifty LED lights on top which let you spot empty (green) or occupied (red) parking from afar. Uber convenient!

6. Acquisition of East Coast Mall at Kuantan
Another addition to the portfolio. Supposedly the biggest mall for people living in the East coast of Peninsular. The deal is expected to be completed before year end.

7. Gearing ratio of 33%
Simply put, a ratio of debt to capital. The lower, the better as the fund borrows less money to invest. Rule of thumb is 30%. This figure is just nice.

8. Defensiveness nature of retail REIT
You still go for "retail therapy" or movies and meals at malls during economic recession, right?

9. Stock price breaking resistance
A bit of technical analysis here. What do you think?

10. Reputable developer
One of the major stakeholder behind CMMT, CapitaMalls Asia is the largest shopping mall developer in this region.

More info on REIT types - by Calvin Passive Income

Disclaimer: The above opinion is not a recommendation to buy or sell. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this blog is ultimately your responsibility.

How NOT to Lose Money in Unit Trust (a case study)

noreply@blogger.com (LCF) — Wed, 09 Nov 2011 15:17:00 +0000

I am not a close follower of the unit trust industry in Malaysia. But if you are, you should have read that RHB Islamic Bond fund NAV plunged overnight 8.323% on 24 October 2011.

News here at FundSupermart

The reason?
Total write down of Tracoma bonds held by the fund portfolio. The value is RM 4.52 million
In layman terms, that means Tracoma defaults on its bond; on its obligation to pay bond holders.Its bond market value drops to ZERO.

This is the testament to the fact that contrary to what most of us thought, fixed income fund is not without any risks.

The history, and a tell-tale sign
The fund manager bought Tracoma bond on 28 February 2005 and it was rated A at that time. However, Tracoma bond was downgraded in February 2007, July 2008, October 2008 and early of January 2009 to BBB+, BB+, B, C respectively before finally downgraded to D at the end of January 2009. The downgrade was due to weak fundamentals of the domestic automotive industry.

*To understand more on bond rating, click here*

At the end of January 2009, Tracoma bond defaulted on its principal repayment obligation. Tracoma slips into PN17* status early March 2010.

Excerpt from iFast interview with the fund manager
When Tracoma bond was downgraded, there was no secondary market available. Also, there were ongoing restructuring efforts by Tracoma Holdings Berhad, which among others involved a white knight undertaking due diligence studies on the company. But, the white knight had pulled out from the study in October 2011.
However, the timeline as to how long the liquidation process and the NAV recovery from write-back may take remains unknown.

Tracoma Holdings Berhad is a leading manufacturer and supplier of automotive parts and components.

The fund's holdings as of 31 Mar 2011 annual report. 4.55 and 4.28% of the fund's NAV!

What YOU, as an investor should do to prevent this from happening to you
Read the annual or interim report for the ratings of the bonds held in the fund portfolio. Any downgrade of bond rating to BB or lower - you take your money and run like a plague! Because by the time news like this hits you in the face, it is already too late! And the fund manager now advises investor not to redeem, as there is very likely to recoup the losses as the bond's secured creditor. Well, if you are invested in, just keep your fingers crossed, or you could cut your losses before NAV drops further.

Do your own due diligence folks!

*PN17 stands for Practice Note 17/2005 and is issued by Bursa Malaysia; relating to companies that are in financial distress.

Read This before Buying any Financial or Investment Products

noreply@blogger.com (LCF) — Sat, 05 Nov 2011 17:30:00 +0000

A recent read of The Millionaire Teacher: Nine Rules of Wealth You Should Have Learned in School got me thinking on the prevalent conflict of interest in the financial industry selling you financial products in Malaysia. The author, Andrew Hallam ultimately delivers a smack down to financial agents who is selling you hideously expensive financial products, earning them fat commissions at the expense of your real investment return.

Layeth the smacketh down - ala The Rock

But that's how product sales in financial industry operates, like it or not.

Why is this so important in Malaysia?
Because the managed funds available are almost all front-loaded. This means you pay the financial agent and their investment companies upfront before earning a single cent.

The main selling point of any financial product is laser focused on their potential gain, but most people only see one side of the coin; they don't realize higher potential return equates higher risk.

There is no free lunch in the world.

Statistically speaking, we end up buying financial products and solutions from someone we like or trust anyway.

This is not wrong.

But it just isn't right if we base it solely on this factor.

Your financial agents
Financial agents in Malaysia are divided into 3 types:

Tied financial agents - agents attached to an institution agency force. Example, insurance personnel, Public Mutual unit trust consultant, your bank's friendly personal financial advisor. Product focused. Fully commission-based compensation.
Independent financial advisers(IFA) - personnel providing comprehensive financial solutions, which includes value-added advisory service (investment needs analysis, tailored financial plan, wills writing, retirement planning) and financial products (insurance, investment ). Nominal fees compensation; largely commission-based compensation.
Financial coach/counsellor - personnel providing high degree of personal interaction and involvement to assist a client in financial awareness and profiling in order to achieve financial independence. Fully fees-based compensation.

Conflict of interest severity rating: #1(High) #2(Medium) #3(Low/Nil)

#3 is the hardest to pull off, and far and between. The successful person that comes to mind is Carol Yip, whom money seminar I attended earlier this year. Carol calls herself, a Money Activist whose organization provides unconventional financial advisory services, keynote presentations, training and workshops that are designed with the application of human psychology into money matters. Basically, no products sale.

#2 is still in its infancy stage in Malaysia; Singapore- there are aplenty. Fin Freedom and Standard Financial Planner (SFP) come to mind. Full time advisers in this category will take a comprehensive evaluation on your financial position and your financial goals, identify the gaps and finally propose one or more financial solutions (consist of multiple financial products tailored to your needs) to help you achieve your goals. Emphasis on long term engagement with the client.

#1 is what your uncle, your ex colleague, the cute lady next door and even college students are involved in, mostly part time basis. Chances are, throw a stone from your apartment's balcony and it is very likely you will hit a tied agent below. Malaysia Market is simply saturated with tied agents. Some may find that being a tied agent complements their main income quite well, while others may find it highly lucrative to the extent of going full time. Bear in mind that part time agents normally can't be expected to serve you diligently.

The paradox of "having your best financial interest in mind"

#2 and #1 will never have your best interest in mind.
Especially #1.

It's not their fault.
It's not their money.
It's yours.
It's your responsibility, not theirs.
No one will ever have your best financial interest in mind better than yourself. Period.

If you walk into a bank, and asked the full-of-smile financial advisor to recommend you the investment product with the highest potential return, who is to blame if you realize you are being charged a 10% fees over your 6% investment return?
Answer: Your own ignorance

Can you guarantee your agent is going to serve you diligently after the sales even if you don't buy additional products?
Answer: No

Then why pay 6% upfront commission while you just need to pay 2% commission via online platform (FundSupermart) to invest in the same unit trust?
Answer: Because you don't know how, don't know what you want, don't have time, don't care and don't want to ask.

I am 200% sure this is not the attitude you adopt in your professional career, so why be so when it comes to your own money.

Provided you still care about your wealth and future. You do, right?

#2 versus #1

I am not lashing out at #1 - tied agents.

There are certainly good #1 out there, but most of the people I know have experience of being approached persistently by #1 (who happen to be a friend or colleague), closing the sale and never be heard again. Only to see their investment plunge in 2008.

We reiterate this - #1s are trained extensively on the art of sale, not on having your best financial interest in mind. How to close a deal, how to deal with a resisting customer, motivation talks, etc.

I am not saying that #1s are not competent in financial concepts or in analyzing client's financial needs. They can be just as competent, if not more, compared to #2. But I would still refer you as tied agent if your eligibility for commission vanishes once you switch agency.

Here's another story on #1.

I spoke to one of my CFP classmate cum ex-colleague recently. He once witnessed that an advisor at a bank was advising an old couple into investing in equity fund.

The couple has no idea what they are getting into - the risk involved, considering their age.

Senior writer of Personal Money, Celine Tan has this to say on her previous stint of being a unit trust consultant:
"Although it was 'lucrative', I felt lack of self-achievement as the client base was not totally mine (despite me putting all efforts to serve the clients)."

Even you are #1, there are people I know which will go to that extra mile to provide value added services/advices to their clients. This is how real good agents differentiate themselves from the pack.

********************************

Conversely, #2 would normally start with advisor fees, which sound alien to most people. But it could be worth every cents because if you are with an ethical FA, you will be made more aware of your financial position and needs before committing to any investment decisions. However, paying a fees just for advice is almost unheard of for many Malaysians, so this is not a viable business model to make a living. And as a client, you still need to make your own investment decision, after evaluating your options -which is a chore for most people.

It is normally harder to start as #2 unless one has a mentor or coach. Or one is an established figure already in the industry.

So now, you decide if it is worth to compensate #2 upfront for a financial plan which take your financial needs into account than the modus operandi of a #1.

Financial agents are not different from us, decent (hopefully!) people who's making a living. He has to sell you products - he got a family to feed too!. Not to mention his sales quota, else he's out of job if he cannot achieve it in 2 years.

But our own ignorance is certainly not bliss here.

So what can you responsibly do?

Get educated on personal financial concepts. Do your homework. Evaluate your financial needs and gaps. Then engage your financial agents. Show him or her what you got. Let them earn their commission, but always strive to minimize your investment cost before we even talk earning a return. Read the fine prints. Read between the lines. Believe me, whichever type of financial agents you choose to engage in the future, he or she would definitely have more respect for you.

Fixed Income Fund NAV determinant: Simplified

noreply@blogger.com (LCF) — Wed, 02 Nov 2011 16:01:00 +0000

Assume last year inflation rate is at 3%. You bought a 6% coupon bond with $ 10,000 which repays you in 2 years. So your real net return was (6-3) = 3% annually.

This year, inflation rate goes up to 6%. . No one wants to buy the same bond you have now for $ 10,000 because the real net return is 0%.

To attract buyers, the bond issuer needs to sell the bond at a discount. This means, new buyers still get 6% coupon payment on $ 10,000, but they only pay upfront, say, $ 9,500. They will be repaid $ 10,000 2 years from now.

Conversely, if inflation rate goes down to 1% this year, the bond you bought last year becomes even more irresistible now due to a net return of (6-1) = 5% per annum. Everyone now wants a piece of the action - new buyers will rush to buy this bond. Based on the law of supply and demand, this drives the bond price up. Hence, the bond is said to be trading at a premium, say, at $ 10,500. New buyers will still get 6% coupon payment on $ 10,000, but now they pay upfront $ 10,000. They will be repaid $ 10,000 2 years from now.

This fluctuation of bond prices is the main factor affecting the NAV of fixed income unit trust fund.

*Inflation rate and interest rate are positively correlated.

A Very Red Market Day

noreply@blogger.com (LCF) — Tue, 01 Nov 2011 16:20:00 +0000

Manufacturing index dropped to 50.8 in October, down from 51.6 in September, a sign of slowdown, according to the Institute for Supply Management. Any reading above 50 indicates expansion. The manufacturing sector has grown for 27 straight months, according to the index.

The Greek government shocked financial markets with news that it would put its unpopular cost-cutting plan to a public vote. If it's defeated, the country could drop the European currency and default on its debt, which would put the European banking system and regional economies at risk of another crisis.

Banks stocks fell hard as investors worried about how exposed U.S. banks are if Greece goes through a disorderly default on its debt.

A U.S. securities firm MF Global Holdings Ltd. became the first big casualty of the European debt crisis on Wall Street. It filed for bankruptcy after concerns about the company's holdings of European government bonds caused its business partners to pull back from the firm and ratings agencies to downgrade its debt.

Credit Suisse Group AG, Switzerland's second-largest bank, fell 9 percent after reported profits that fell short of expectations. The bank also announced plans to retrench 1,500 people from its payroll.

LCF on Personal Finance: Any time you got these phrases put together in one day, you know it is a bad omen - bankruptcy, retrenchment, default on debts & manufacturing slowdown. Volatility is rising again. Protect your investment portfolio, whatever they may be.

The layman's explanation of: Why Switch to Fixed Income Fund during Recession

noreply@blogger.com (LCF) — Mon, 31 Oct 2011 14:40:00 +0000

Assume that I wish to borrow a lump sum of money from you, which I am going to repay 2 years later. In return, you think you need 10 percent return for the trouble. On top of that, you require a bonus payment of $ 1,000 at the end of each year to sweeten the deal.

We put this in a contract. To recap, the conditions are:
1. You lend me a sum of money for 2 years.
2. I will repay this principal amount in full, exactly 2 years from the date you transfer the money to me.
3. I will pay you $ 1,000 for the 1st year, and another $ 1,000 for the 2nd year.

Note that I did not commit giving you 10 percent ROI (Return of Investment) yet because I need to survey around what is the ongoing rate people are willing to borrow money.

Say, 2 weeks from now, I deduced that I need $ 10,000

Now, just before I request you to transfer the money to me, I realize everyone around us is willing to lend me $ 10,000 for 2 years, for a 8 percent return.

Of course, it makes perfect sense for me to borrow from anyone who is willing to contend with 8 percent interest. However, I want to honour the contract we have put down in black and white.

So I approached you and told you this fact. Apparently, you too, have discovered that the ongoing market rate is 8 percent. With everyone around willing to accept 8 percent ROI, you will be the last person anyone would come to borrow money from if you insist on 10 percent.

You now agree to accept ROI of 8 percent on your principal, inclusive of the 2 bonus payments.

In order to avoid the hassle of altering any of the 3 terms in the contract earlier, the only factors that we can change here is the amount of principal you will lend me today.

In MS Excel, key in this, without the quotes: "=PV(0.08,2,1000,10000)"

You will now lend me $ 10,356, a little extra than $ 10,000 which I require.
(Note that if required ROI were 10 percent as previously, and everything being equal, you would have lend me $ 10,000)

The analogy here:
Me: Bond issuer
You: Bond buyer/institutional investor
$ 10,356 : Price of the bond
8 percent: Market current interest rate in direct correlation with Base Lending Rate (BLR)
2 years: Bond maturity duration

This explains why when market is down (characterized by lower interest rate and plunging stock market), your friendly neighbourhood UTC will ask you to buy or switch to Fixed Income Fund. Most fixed income funds essentially consist of government and corporate bonds which goes up in value during economic recession. Generally, when the bond portfolio in fixed income fund rises in value, the Net Asset Value (NAV) of the fund goes up. Other factors such as the bonds' rating and duration to maturity also affect your investment return; lets save that for subsequent posts.

A Dilemma: Child Education Cost versus Your Personal Finance

noreply@blogger.com (LCF) — Thu, 27 Oct 2011 15:20:00 +0000

In my previous post on child's education cost in 20 years time, I calculated an estimated amount of no less than one third of a million ringgit based on the future value of money and annual inflation rate of 4%.

Mind you, that is just the cost of one of your children's tertiary education.

We have not factored in all the expenses for raising a child from the day you brought them into this world.

The 40+ years old Singapore millionaire teacher and investor, Andrew Hallam who earns a middle class salary is an epitome of frugal living. One important point to note is that he and his wife do not have children.

I am pretty sure that most of us would have a net worth close to a million too by early 40 if we practise prudent financial management, actively growing our money and by not having children. Early retirement, woohoo!

The fact is obviously clear that by not having a child, either by choice or not, is the "catalyst" to financial freedom.

But this is not something I personally would do. While I am not married yet, I could understand that the joy and fulfilment of watching your son or daughter growing up is simply priceless.

So what are the options?

The most realistic way is to ensure you child performs at least, above average academically in high school. This will enable your child to secure either a private or public scholarship for his or her university studies.

Yes, academic achievement is not the only yardstick of success in adult life. But you know what, it helps a lot - the parents and their child. I can say this because I am walking the talk here - being a former state scholarship award recipient. All my tuition fees were covered by the state government; plus a nominal allowance. That significantly lightened the burden on my parents' pocket.

Then there is this ever popular PTPTN study loan you can apply to fund your education. However, a loan comes with repayment interest, no matter how low the interest is. Study loan is really a bad debt in your later years. If you are an undergraduate, have you ever digested the fact that you already owe the government money even before you earn your first salary? My fellow blogger, Kris, has a very comprehensive write up on why you should reject PTPTN 1% Ujrah loan

I got to admit that public scholarships are still very competitive though - you got to be the creme of the crop. All is not lost, however, as I believe there are a few private scholarships around, offered by corporations like YTL, Telekom, Petronas, IOI, etc. Most colleges have their own allocation of scholarships too, granted based on SPM/STPM/Diploma academic results. Of course, sustaining a certain standard is expected of the students, or else, the grant will be revoked.

Do you have any experience to share as a parent or as a scholarship recipient?

Bad news: Debit Card Fees

noreply@blogger.com (LCF) — Mon, 24 Oct 2011 15:00:00 +0000

If your bank need to charge you an annual or monthly fees for the debit card you own, what would be your first reaction?

Absurd.

The Good News: That is what just happened in US.

Apparently, Bank of America will start charging debit-card users $5 a month if they use their debit cards for purchases in any given month, starting next year. The fee will not be triggered by transactions at automated-teller machines.Paying to use a debit card was unheard of before this year and is still a novel concept for many consumers.

The move came due to a regulation which will cap the fees that banks can collect from merchants whenever customers swipe their debit cards starting 1 October. The limits on debit-card swipe fees—one of the most contentious regulations to arise from the financial crisis—were finalized by the Federal Reserve Board in June. The new rules will cap at 24 cents the fee merchants pay banks each time a customer buys something with a debit card, down from the current average of 44 cents. The rules apply to banks with $10 billion and more in assets.There is no similar cap on the merchant fees that banks can collect when customers use their credit cards, however. That means many banks are increasingly encouraging customers to reach for their credit cards, in hopes of reversing a trend toward debit card usage in the past several years.

In Malaysia, debit cards (new issue) are still free of charge. However, say for Maybank, converting from your ATM card to Visa debit card will cost you RM 12. Thanks, but no thanks.

I am pretty sure, though, if debit card fees from merchants are capped here, Malaysia banks will follow suit to impose debit card annual fees. Let's face it, once upon a time, the spread between mortgage interest rate (Base Lending Rate, or BLR plus before 2008 market crash) and fixed deposit rate is large. That is where banks made a large bulk of their profit without much effort. Now, with FD rate at 3_%, and competitive mortgage interest rates of BLR 6.6% minus 2_%, banks' profits are being squeezed hard. Banks need to formulate more creative ways to grow or at least sustain their revenue. In this case, the loss of revenue is transferred to customers. The other day, a transaction to reset my CIMB bankcard costed me RM 12. Some people also complained of CIMB's very slow TAC SMS reaching their mobile especially during peak hours, and now there is an option to purchase a RM 65 TAC device. Thanks again, but no thanks.

Have you had any experience of being charged any unreasonable fees by your bank?

Update 2 Nov 2011
Bank of America Corp is dropping plans to charge a $5 monthly fee for debit card use, the bank said in a statement on Tuesday.
The second-biggest U.S. bank said the move was in response to customer feedback and competition.

How much insurance one really needs?

noreply@blogger.com (LCF) — Thu, 20 Oct 2011 15:56:00 +0000

A case study based on Total Needs Approach:

Say, Mr Lim, aged 35, earns $ 100k annually. He is married with a 3 years old son. Should he dies, he wants his family to have an annual income of $ 60k for the next 25 years, with the first payment due his death. He also needs to ensure his son is provided with at least $ 150k for his tertiary education in 15 years time. His biggest debt includes his house mortgage with $ 250k outstanding amount. His wife is also working and will be able to service the house mortgage with her salary.

Net worth statement

Assets

1. House market value = $ 500k

2. Equity and unit trust = $ 50k

3. Bank deposits = $ 10k

4. Existing life insurance = $ 100k

5. EPF = $ 200k

6. Group insurance death benefit = $ 30k

Total assets= $ 890k

Liabilities

1. Outstanding house mortgage = $ 250k

Calculation

A conservative projection of 5% per annum of money growth, slightly outpacing inflation.

Present value of annual income

PMT = $ 60k, i = 5% , n = 25 years, PV = ?

The Present Value is $ 888k (good number!)

Present value of son's education cost

FV = $ 150k, i = 5%, n = 15 years, PV = ?

The Present Value is $ 72.152k

Total liabilities = $ (250k + 888k + 72.152k) = $ 1210k (that's 1.2 million).

There is a shortfall of $ (1210k - 890k) = $ 320k. This is a rough figure for the additional insurance coverage needed.

It is prudent to note that the shortfall can be less than this because:

1. Existing investment and bank deposit could earn compound interest over the years if his wife manages his portfolio well after he is gone.

2. Assuming the sole beneficiary of his EPF fund and life insurance policies is his wife, this lump sum amount can also be invested to earn compound interest.

3. We all know that properties value appreciates over the years!

What do you think of this approach? Is it fool proof? I am sure when you first started working and bought your first insurance, your agent only asked you how much premium you can afford to pay per month, and then he will quote you the coverage accordingly. No insurance agent came to me before and offered such details. Okay, then again, I would not be interested with all this at that time, plus, when you are not married, you have no dependent yet. However, when reaching certain stage in life, I believe it is critical to look into your insurance coverage to ensure all financial risks to your family are minimized should you pass away.

Now, can anyone quote me the approximate annual premium for life insurance coverage of $ 300k?

Of RIM Blackberry, Value Investing and Leverage

noreply@blogger.com (LCF) — Tue, 18 Oct 2011 13:46:00 +0000

I am sure you read of longest ever worldwide Blackberry network outage last week. The three-day blackout interrupted email and Internet services for tens of millions of frustrated users and inflicted more damage on an already tarnished brand. It is definitely threatening to cost the granddaddy of all smartphones more business when it's already struggling to keep up in a crowded marketplace. Even for many Blackberry loyalists, this could be the straw that broke the camel's back.

BlackBerrys get their email through RIM's centralized setup, allowing the company to offer a high level of security. But when something goes wrong, it affects millions of people at the same time. Blackouts are not localized to one company or one carrier, as other outages are.

When I read this, I personally feel the sentiment - no, I have never used any Blackberry but my relationships with RIM stocks had been turbulent to say the least.

When I first delved into the world of stock investing, value investing is only belief I held on. It still is, but that's just one among the many things in my list.

In June 2010, when I bought the stocks, it is a value stock for long term holdings, whichever angle you look at it. Balance sheets are solid, and cash flow's strong. The intrinsic value is there, and it was truly undervalued at its price then. The technical analysis for entry is all in the right places.

In its heydays before 2008 market crash, its market price was hovering at $ 130+. It is an unmistakable bargain at $ 60+ - huge one.

However, what I, and as many people, failed to see is the rapidly declining market share in the smartphone market one quarter after another. It is currently at a beaten down price of $ 22+

Steve Jobs said you cannot connect the dots looking forward, but in this case, we too, could not connect the dots looking backwards!

I sold my RIM portfolio exactly 1 year after I bought it. Right after the quarterly earnings in June 2011 to be precise. Even then, I was losing more than 30 bucks per share, or about 57% of the cost. It was not a great feeling, but in share market investing, we will all come to realize that faith and hopes will bring you disappointment. By the way, if you were in my position, don't lose any sleep over this because there are more important things in life.

I didn't do panic selling. However, I took quite a huge risk and leveraged my RIM holdings by purchasing put options shortly before the earnings D-day, having picked up tips from my mentor. This is in spite of the rising Implied Volatility as it approaches earnings announcement, which rendered options to be priced higher. Not for the faint-hearted :)

That has enabled me to recoup most of the losses incurred when the options went from out of the money to deep in the money. How deep? An unbelievable 20% stock price drop in one single day. For put options, the gain is a few hundreds of percent.

What would you have done differently if you were in my shoes? Have you made a wrong entry buying the wrong stock, and end up having unrealized loss but finally made a comeback?

Note: This post is a contradictory article to a simplified personal finance concept. I don't usually blog about stocks investments; these are not the domains of a man in the street. Foreign stock market investment takes a lot of time and effort; and currency exchange risks are something one must be able to stomach. Very taxing for anyone with a day job unless you are a fund manager or investment banker.

A Tale of Middle Class Millionaire

noreply@blogger.com (LCF) — Sun, 16 Oct 2011 15:01:00 +0000

This is a pretty inspiring story for school teacher Andrew Hallam, a self-made millionaire investor in Singapore. Here's some of his simple personal finance principles which we all could relate to.

Drawing a middle class wage, he had become a debt-free millionaire in late 30s because of his investment portfolio. He paid his own educational expenses, and did not inherited a penny from anyone.

Now 41, he teaches English at the Singapore American School and his financial outlook includes a respect for restrained spending.

He valued money from the beginning because he didn't have a lot. (How many of us does anyway right? Yet some people spend more money psychologically, citing excuses of such behaviour as "therapeutic" because they "didnt' have a lot")

He added that increased wealth, beyond a certain level, doesn't add to happiness. (True! Just think of the days when you were still an undergraduate versus now)

The earlier one starts investing, the better, he thinks. "Be happy when markets are falling if you're young".He made money after market plunges such as after the 9/11 attacks, when the Iraq war broke out, and after the 2008/2009 global financial crisis. His portfolio is worth US$1.4 million

He believes that "the average college-educated person in Canada, America and Europe" lacks basic financial education. (Malaysia too, Mr Hallam)

He mentioned that for the most part, most of the people who are not financially literate were being taken advantage of, by the financial advisory industry. (Also by all financial institutions as well. Ensure you know the basics of personal finance concepts, and ask questions!)

He points out, that hidden fees in financial products erode investors' profits. "Advisers get paid well when you buy actively managed mutual funds aka unit trusts. (That is why, you got to be calculative of your investment cost rather than looking at the returns alone)

For someone who likes the challenge of investing and watching his money grow, an added challenge for Mr Hallam is: "How can you actually use money to enrich your life and your soul?" The answer, for him, is to selectively give his money away. For example, he helps others by giving to organisations in Cambodia and India, which help people build a living for themselves. (I have not reached this level yet, but I start small by donations to World Vision)

Final quote from Mr Hallam

Someone with a $600,000-a-year salary, making payments on a Ferrari, isn't necessarily rich...

...but someone who can sustain his lifestyle for the rest of his life by not actively working is.

Excerpt from Mr Hallam interview with Today

Business Conditions Index: BCI3Q2011

noreply@blogger.com (LCF) — Fri, 14 Oct 2011 15:43:00 +0000

In my previous post, I did mention that if BCI continues to trend down for Q3, a double dip recession is likely in Malaysia.The BCI for Q3 has just been released by MIER.

The gist of it: Business is still expanding but slower.
The highlights:

Index down a marginal 9.5 points to 104.5 q-o-q.
Sales, production and new export order has dropped q-o-q as predicted in Q2.
A further slump in sales and production is anticipated as we move into the final months of 2011.

As long as the index stays above 100 points threshold, it will not be a sign of contraction, yet. Still, keep our eyes open for any global economy news for Q4. And it's US corporate earnings season again. As of the writing of this post,Google just reported that its third-quarter revenue was one-third higher than last year - good news for the Street! Also, retail sales in the US increased 1.1 percent in September, the biggest gain in seven months and twice what economists projected. Retail sales are a key barometer of consumer spending, the biggest contributor to economic activity. Consumers account for 70 percent of economic activity. If they cut back, a recession is more likely. When they spend more, economic growth is more likely.

In conclusion, if you have got all your eggs (money) in one basket (stock market or equity fund) still, I would watch the eggs closely. Cash in when the bear starts to roar!

3 basic must-ask questions to a Unit Trust Consultant

noreply@blogger.com (LCF) — Tue, 11 Oct 2011 15:32:00 +0000

1. How much could I possibly lose?
2. What are the upfront and hidden costs?
3. How long can I double my money compared to FD rate?

WHY?

1. Test your agent's honesty. If he/she guarantees you not to lose money, you can ask him/her if he/she is going to compensate you with his/her own money when you DO lose money. The point is, I expect the agent to give me honest info on the performance of the fund, especially in 2008, without sugar-coating or with manipulated marketing material. As an investor, I know I got to be realistic; for instance, no equity fund will make money during recession. But if you are an agent with integrity, I might end up buying the same fund from you than someone who's misleading me or giving me empty promises.

2. Be aware that your upfront sales charge and the yearly management fees of the fund will erode your profits. If your agent is not able to show you the figure, then you are a smarter investor than him, who is nothing but a mere salesman. Do you want to hand over your money to such agent?

3. Expect him to answer this in....no longer than 10 seconds. It's based on the simple Rule of 72. If FD rate is 3%, you will double your money in (72/3) = 24 years. If your projected annual return is 6%, it will take (72/6) = 12 years to double your money. Your agent should be knowledgeable enough, else, he is just incompetent.

If you are a UTC, equip yourself with these, among others. Simple yes? But I am surprised at how many agents who don't know the basics; instead being solely the sales person who has mastered the art looking as if they care about your money.

Be calculative of your unit trust investment return

noreply@blogger.com (LCF) — Sun, 09 Oct 2011 15:39:00 +0000

Say, you invest $ P in the best unit trust exactly for 1 year. You read that your unit trust profited by A % per annum the same year.

Digest this...

Your profit is A LOT LESS than A%

The Agent
His value to you
The middle+sales person bringing your money into the fund. Most highly paid in terms of sales charge and service. He better be providing damn good service in terms of:

· Solid and honest advice on the best investment option available
· Condition of your money in the fund any given time

He gets X% of your $ P.

The Company
His value to you
Providing you the opportunity to invest in diversification in terms of asset class and industries.
They get Y% of your $ P.

The Managers

His value to you

Make more money for you, ensure you don’t lose money in bad times, and earn above average in good times.
He gets a hidden and RECURRING Z% of your $ P.

Your actual return, B% = A% - (X + Y + Z)%

Now, B% should be

a) more than 0% (duh)

b) more than 3% per year (FD rate)

...or else, forget about redeeming it within a year! You should let is sit and simmer for at least another year or so to do better to at least break even AND cover the upfront costs!

Signs of 2008 economic recession approaching?

noreply@blogger.com (LCF) — Mon, 03 Oct 2011 14:30:00 +0000

BCI for Q2 2011

BCI for Q2, just before the plunge in Q3 2008. See the similarities?

Let's keep an eye for the Q3 BCI to be released soon by MIER.

Another signs for those who are working in US MNCs - companies are conserving cash flows since the start of Q3 this year, and some have even frozen hiring activities unless with strong justifications.

Time to cash in your paper gain from the stock market. Fasten your seatbelts for the wild ride ahead people!

Unit Trust Risk-Return Part 1: The Sharpe Ratio

noreply@blogger.com (LCF) — Sun, 18 Sep 2011 15:50:00 +0000

In any financial investment, risk and return go in parallel. Guaranteed return is known as risk-free return, and almost always refer to either Fixed Deposit rate or Malaysian Government Securities coupon rate. If you are buying government bond such as Greece, it is no longer risk free anyway! FD rate seldom goes beyond 4%; here's a summary of the current risk free rate of return (FD).

Sharpe ratio of an investment refers to how well the investment generates a return taking into consideration the risk. Risk is high when the investment nature has high volatility - tendency for its value to soar or to plunge excessively within a specific timeframe when benchmarked against the overall market activity.

For the mathematically inclined, the equation is as such:

Sharpe ratio for Investment Z = (Investment return for Z - Risk Free Rate of Return) / Standard Deviation for Investment Z

High volatility = High Standard Deviation

Sharpe ratio --> Higher is better.

Taking Risk Free Rate of Return as constant, 2 factors contribute to higher Sharpe ratio

Higher investment return
Lower volatility

Let's illustrate this with unit trust examples of the same asset class - Balanced Fund Malaysia.

Notice that Kenanga Growth and AmBalanced has the same risk-adjusted return, 0.68. However, note that Kenanga Growth is more volatile (10.9), therefore the return needs to be higher - 9.7% compared to 7.6% for AmBalanced.

If you are a above average risk taker, buy Kenanga Growth and bear more risk of larger price NAV price swing at the same time. Else if you are a below average risk taker, AmBalanced is for you.

Next, compare OSK UOB Kidsave with AmBalanced. They have nearly the same volatility, but Kidsave produces significantly higher return at 12%, therefore its Sharpe ratio is double of AmBalanced's.

Logically, Kidsave is a way better investment of choice.

Finally, we compare OSK UOB Kidsave with RHB Capital, which is a Equity Fund Malaysia. RHB Capital produces 14.4% return, marginally higher than Kidsave but naturally with much higher volatility of 15.01.

The additional risk that comes together with RHB Capital is not worth the additional 2.4% return compared to Kidsave - as indicated by a lower Sharpe ratio of 0.81

Happy hunting for funds of your choice!