Total Pageviews

Saturday, 26 November 2011

ASB Financing. Is it worth?

This is really a busy month and i am preparing for my coming ACCA exam.Totally exhausted with all those hectic revision.

Today, i want to discuss about a PNB product, Amanah Saham Bumiputera (ASB). Those bumiputera out there must have heard about this scheme before. It is the best investment in the town for those who are really prudent. Why i say so? because its risk is near to zero (backed by government) and the return is quite high. The maximum investment for an individual is up to rm200k.

There are 3 local bank currently providing this scheme in the market. They are CIMB bank, Maybank and RHB bank. Should we take up the loan? Does it really worth to take the risk? Let us carry out some research here.

CIMB bank     BLR-1.65%     longest tenure 20 years
Maybank         BLR-1.65%     longest tenure 25 years
RHB bank       BLR-1.55%     longest tenure 20 years
EasyRHB        BLR-1.00%     longest tenure 20 years

All loan package is built-in with MRTA insurance, thats mean if you are deceased (touchwood). Your dependent can inheritate the loan borrowed and no need to repay the remaining obligation. The loan is collateralise by certificate, if you default the loan payment for a consecutive of 3 months period, the bank has the right to cancel the loan on behalf of you. Since the bank got the certificate as collateral, the loan is also easy to be approved.
     
Let us look into the past return of ASB,

Year Dividend (sen) Bonus (sen) Total (sen)
1990 8.00 6.00 14.00
1991 8.50 4.00 12.50
1992 7.50 5.00 12.50
1993 9.00 4.50 13.50
1994 9.50 4.50 14.00
1995 10.00 3.00 13.00
1996 10.25 3.00 13.25
1997 10.25 1.25 11.50
1998 8.00 2.50 10.50
1999 8.50 1.50 10.00
2000 9.75 2.00 11.75
2001 7.00 3.00 10.00
2002 7.00 2.00 9.00
2003 7.25 2.00 9.25
2004 7.25 2.00 9.25
2005 7.25 1.75 9.00
2006 7.30 1.25 8.55
2007 8.00 1.00 9.00
2008 7.00 1.75 8.75
2009 7.30 1.25 8.55
2010 7.50 1.25 8.75

Based on the historical performance, the dividend has never dropped below 7.00% p.a. Besides, the bonus are counted based on the average historical savings inside your ASB account for the past 10 years. Thats mean the longer you save, the higher the bonus will be.
The interest for the loan is count based on reducing balance method. Therefore, the longer you finance the loan, the interest will be lower. Whereas, the ASB investment is based on compound interest basis.

I personally found that CIMB has better offer. Let me do an assumption here, the bank loan is based on compound interest basis

Take up ASB Loan rm100k, Interest BLR-1.65% throughout the tenure,
Monthly commitment will be rm657 for 20 years.

rm657X12mthsX20years= rm157,680

substitute into compound interest formula,

rate of interest for bank is unknown for compound interest basis, 
P(1+r)^n
100,000(1+r)^20= 157680
r= 2.303%

In worse scenario, we still can get 7% dividend from ASB scheme. After doing some calculation and logic thinking, my conclusion is taking up the loan is more profitable than self savings. It is a simple arbitrage, you use a lower cost of financing to invest in a higher return investment. It is leverage on bank resources to earn more money.

To take up this loan, we must be very patience and discipline, do not use the dividend to cover personal expenses or spend on luxury (before the maturity of the financing) but retain it in the subsidiary bank account.

The risk to be considered are:

1. OPR shoot up, BLR will goes up proportionately, but for short term it is unlikely. Since our government is encouraging foreign direct investment (FDI), We need more foreign fund to encourage GDP growth. interest too high will drive out foreign investor.

2. ASB dividend drop to a certain unexpected level. Refer to historical return, I think the chance of occurence will be very low. (if this really happen, you can cancel the loan at any time, since the lock in period is 3 years, there will be no penalty after 3 years if you cancel the loan.)

Below is my strategy.

(1)  Create an Airasia savers account from CIMB, so that you can earn higher interest for the fund inside your subsidiary bank account. (since the interest rate p.a. is 1.6%, quite high for savings account though) for the sole purpose of financing this loan. (dont get an atm card to avoid temptation on spending it and can save rm8 annual atm charge.)

(2) Dont take full rm200k instead of taking rm100k loan from the bank, so that if you have more cash flow every month, you can pump the money inside the account until rm200k full. Finance it for a tenure of 20 years. (the longer the tenure, you will have more free cash flow every month).

(3) Monthly commitment is rm657 (based on BLR-1.65%), thats mean ur yearly commitment will be rm7,884.

e.g. if you can save rm300 every month, you can transfer it to the subsidiary bank account monthly. Take out rm4,284 (rm7,884-rm3,600) from your ASB account and inject to your subsidiary bank account. It your monthly savings is not enough to cover the loan, transfer the ASB account fund to your CIMB bank account as a last resort. Maintain a fixed float of at least rm1,000-1,500 inside the account as a cushion for margin of safety.

(4) Arrange standing order with the bank to debit the monthly commitment of rm657/month from the subsidiary account.

(5) After 1 year, let say ASB will declare dividend of 7% (worse scenario, the yield will be higher if dividend higher), so you will get rm7k and havent taking account of the bonus and your existing savings inside the ASB. Then take out the dividend of that year and transfer to the subsidiary account and let the bank direct debit again.(maybe you need to contribute more rm600-700 yearly from your own pocket if worse scenario happened).

Do this consistently and let the compound interest do the job, after 20 years, the rm100k all is yours. Although rm100k may not be as much as today value due to inflation. But you can hardly find any investment better than this in the town. Your initial capital is only rm7.884-10,000 and get rm100k ROI after 20 years. (Thats mean your ASB is compounded at 12.00% at least if you substitute in the compound interest formula.)

If any bumiputera investor wishes to take up this loan, feel free to contact me, i can introduce a financial consultant  to you all.

Happy investing. =)


Thursday, 17 November 2011

Investment

It is my first time to write investment blog. Nowadays, alot of people are talking about inflation. What inflation actually is?

It is the lost of purchasing power of money. We may heard the elder generation said their bucks worth much more in the past, but the value of money has been depreciated over the time. So, what can we do to get rid of inflation? Yes, we should starts INVESTING. Investing can help you increase the value of your money through market exposure and achieve your financial goal. At least, it can preserve your dime from inflation which eating up your money.

 
However, alot of people has mingled certain terminology. Let us look into it.

Gambling-- it is an activity you expect to get huge return in a very short period, but it is hardly to estimate the risk inside it. I can certainly say the chance of success is 50/50. Thats why we can't find any fellow who can get rich by gambling through doing it consistently.

Speculation-- It is an activity to purchase any types of investment vehicles which expect to gain huge return without taking into consideration of the risk behind it. Therefore, they do not look for margin of safety. Maybe you are lucky enough to beat the market once or twice, but you can't do it consistently.

Investing-- It is an activity to put certain amount of capital at risk which can be estimated. We can hardly see people get rich by investing in just one day or short period. It took a long time to bear the fruit of investing.Thus, investing is the safest step to build a great wealth through ringgit averaging cost method.

Before talking about investment, we should get a life insurance policy first. At least, a medical card and cover 36 critical illness. Because we wouldn't know what will happen tomorrow. IMHO, insurance policy is to guarantee your life from risk and secure your dependent if you are the only breadwinner in the house. Therefore, those investment rider plan can totally be avoided.

When should we starts investing? The earlier the better, it does not matter how much money u got, as long as u have few hundred bucks in hand. 

Before starts in investing. We should understand the types of investment vehicles. Every types of investment do bear certain amount of estimated risk. It is all depends on your own risk appetite. The golden rule is the higher the risk, the higher the return.

Fixed deposit/ CFD
This type of investment is the safest investment which is guaranteed by PIDM. An individual deposit account is secured by the Bank Negara up to rm250k. Therefore, the return is very minimal (roughly 2-4% depends on economy), it is suitable for those who has large sum of capital but are risk averse to the investment outcome.

Unit trust/ Mutual fund
For those who has long investment horizon and wish to achieve great wealth. This is the good platform if you don't have investment knowledge and expertise.(fund manager usually can get access to insider information which is not available to individual investor). There are alot of investment house and fund to be chosen in the market. They will invest on behalf of you in the investment platform and earn certain percentage of fund management fee from their client . There are 2 types of fund most prominently available in the market. They are bond fund and equity fund. For youngster, I would recommend starts investing in equity fund because equity fund will certainly perform better than bond fund in the long run through compound interest.

IMHO, there are few funds I would recommend for public mutual, such as public ittikal fund and public aggresive fund. Besides, we can also look into PNB fixed price fund such as AS1M and ASM. However, these fund is not always available and has quota.Therefore, you must grab the fund as fast as possible if government release new units. The fund can guarantee a minimal return of 6% annually, far better than fixed deposit. If you are a lucky bumiputera, ASB is the best choice since the quota limit is rm200k for each individual and generate at least 7% dividend without taking account of bonus. Besides, PNB fund are tax free investment vehicles. Therefore, it is very good choice  for those who hit the personal income tax threshold limit and want to own a peace of mind investment scheme.

Shares
If you think that you can beat unit trust return through investing by yourself or you got insider information (illegalised by Security commission) Then, just go ahead by exposing yourself to the irrational market. I would recommend you to set aside 20% of your portfolio asset to start investing in the irrational market when you are young (but not speculative purpose). It is very challenging to watch your security made capital gain or loss every month. Owning the shares means we are having a stake of the company, you are the shareholders. Therefore, you can attend their General Meeting to discuss the company's issue.  Besides, you can get dividend if the company has excess distributable profit. Therefore, it is better than unit trust if you manage your portfolio in the correct way because you can save the management fee and the realised capital gain is 100% not taxable.

Bonds
Besides shares, we can think of corporate bond or government bond (but not junk bond). The bond is a listed security. However, it is not popular in Malaysia since its return is close to FD. However, convertible bond is one of my favourite, you can convert the bond to certain amount of share in the future upon maturity or let the offer lapse. It is interesting if the company did well, you can earn a huge return by converting the security. hehe

Real Estate Investment Trust (REIT)
Now, comes to my favourite. Thinking of property? Property will certainly appreciate if you invest it long enough, because size of population will only getting bigger and the demand for shelter will be increasing. Nowadays, you need not to get access to the landed property to own it. It is a traded security which is listed in bursa, you can earn the return like any of the listed company through capital appreciation and dividend. However, the dividend is not tax free unless the it is single tiered.


Here are the basic investment vehicles i can think of. Hope it can get closer to your financial goal. Besides, there are other derivatives available in the market such as warrants which is more complicated. I will discuss again in my upcoming blog.

Think. Net Worth!