INVESTMENT PLANNING Investing is putting out money to be sure of getting more money back later at an appropriate rate. Warren Buftett Investment means the commitment of current resources/money with the expectation of receiving a larger amount of resources in the future. We invest to make money in order to improve our welfare, for financial security, tohave funds for emergencies, to reach financial goals and for a secured retirement. There are a lot of opportunities nowadays to put our money and let the money grow. In other words, there are many investment opportunities that are available in the market. As a Muslim, investments chosen must be Islamic; should not involve jnterest/usury, gambling, alcohol, pork and conventional insurance. All investments must be permissible to gain barakah/good benefits. We need to know our needs or financial goals, the various classes, how the market functions, to structure our portfolio and to : Seip the investments.) To know our financial goals or needs will, enable us to determine the suitable types of investments for us. This is done by determining our risk tolerance. Are we risk takers or tisk adverse persons? Ifyou are arisk taker oF an aBe'es W person, you will want the best possible returns by taking 2 greater risk, You are happy to leave your money in andoN ride the ups and downs, even if it means taking a loss Some tim term. An example of high risk investment is an iny, PERSONAL FINANGIAL PLANNING eS in €stment in sha’ Shon 8, Arisk taker will invest a majority of his funds in high risk j and have lesser amounts to be invested in moderate an Won ot investments. As an example, your asset allocation may look lite Tis IS; Assets Investment 10%: Low Risk Figure 7.1: Asset Allocation — Risk Taker A risk adverse person in contrast simply prefers to take less risks. Investments in fixed income securities become a priority and she/he is willing to accept lower returns for investment securities. For a risk adverse, an example of the asset allocation may look like this:ChapTer 7: InvestMeNT PLANNING DD Assets Investment 0%: High Risk Figure 7.2: Asset Allocation - Risk Adverse Besides risk tolerance, age also play an important role in determining the suitable types of investments. If you are young, you may be classified as arisk taker because you may assume higher risks since the time factor allows you to recover potential losses. On the other hand, if you are older, you may not want to be a risk taker because of the time factor. When we talk about risks, they will come together with returns; the higher the risks, the higher the returns to be expected. - Invest tis] 5 that may affect us vary oe are inf risk, interest rate risk, market risk ani fail Inflation risks can reduce our real purchasing power as changes in the price of goods and services due to inflation affect investment returns, An interest tate risk is the risk associated to changing market interest rates which mainly affect fixed income investments for example bonds and preferred shares. This type of risk may also affect investments in shares. Market risks on the —— Jate to the uncertainty of markets due to changing political ee han vo fitions. Lastly, a business failure risk arise may due to a and ony oobad management, unsuccessful products, competition or any possibilit ther factors that will cause the business to be less profitable. other facto! 181i) PeRsONAL FINANCIAL PLANNING This chapter will focus 00 investment planning bg dus in Malaysia’s investment sector, Then ON th TE ate m, opportunities aroun types of investment alternatives available in Malaysia or we haye many Varig Us assets classes. TYPES OF INVESTMENTS ount (There is an argument among schoy ars 1. Investment in savings acc ts whether it should be consi sidered as an regarding savings accoun investment item or not). 2, Investment in fixed deposits account or time deposits. 3, Investment in shares. 4, _ Investment in bonds. 5, Investment in real properties. 6. _ Investment in unit trust. 7. Others (Goventnes Le _— INVESTMENT IN SAVINGS ACCOUNT t that an individual will have is to save in the depositor can eam mbaga Urusan dan Tabung Haji). The most common investmen! a savings account. By having a savings account, interests or can participate in profit sharing with the bank. Itis encouraged to have two savings accounts; one account is to meet daily expenses while the second account is used for wealth accumulation. Investment ina savings account is necessary for a better retirement. This is one of the long-term objectives of a savings account. Besides that, a savings account can used to acquire fixed assets. can be used to meet the xpec to go for a vacation. It is advisable to transfer the amount for a savings account for investment at the beginning of the month in order to avoid overspending. In personal financial planning. we have to put savings as a priority; next will be to pay for expenses. In the short run, a savings account use of cash, to buy short-term assets, Or s account is an interest-bearing deposits account. Before A saving: this, an account holder for a savings account will be given a passbook. Nowadays, commercial banks will issue statements rather than passbooks- t ON- With the availability of the internet service, a depositor also can ge! 182 — — i ag> nee Besides passbooks, an account holder can also have ie sxomated Teller Machine (ATM) card for easier and convenient tA wal of funds from his or her account. Not only that, an account can deposit money through an ATM. i Charter 7: Investuent Planing A savings account can be divided into three types: Individual savings account. Joint savings account. / Savings account for associations, societies and clubs, A bank also offers trustee accounts and accounts for minors. Interest on a savings account is calculated on the account’s outstanding balance at end of each day. However, the interest is credited to the 4ccount every six months that is on June 30th and December 31st each year. The formula used to calculate the interest amount is the calculation of simple interest. The formula is as follows: (as being formulated under Association of Banks/ABM rules) Interest amount = Principal x Time x Rate *Principal here is the balance at the end of each day of the month and Time is 1/365 A savings account is also offered under Islamic Syariah principle by Bank Islam, Bank Muamalat and conventional commercial banks. This savings account is under the Al-Wadiah Yad Dhamanah principle. A savings account under this principle is where the bank accepts deposits from customers looking for safe custody of their funds, at the same time, allowing the customers to withdraw their money at any amounts any time. The customers will enjoy the sharing of profits rather than being paid the interest amount. An Al-Wadiah savings account can be opened by individuals, societies, associations, and clubs whether by Muslims or non-Muslims. The customers are given the savings passbooks or statements sent by mail or statements on-line. 400BR teers 27AFTA HIPHN PERSONAL FINANCIAL PLANNING The profit distribution can be calculated b; : : as daily balance and by using this formula: don the Aeoune Vera Re Cumulative daily balance for the month Profit = ———_—"— rin R 1 Number of days inthe month TEx ie INVESTMENT IN FIXED DEPOSIT (FD TIME DEPOSITS (FP) ACCOUNT OR This type of investment has better returns than a savings account. period can be 1, 2, 3.....or 60 months. The interest is fixed at the te | deposit is taken. The interest rate for more than 12 months can be eae te between the customer and the bank. Banks are allowed to accey a vad of any amount for time deposits except for time deposits of one month, ie the period of one month, the minimum amount of deposit is RM5000, 7 The bank may quote appropriate interest rates which are displayed on a special board within the bank premises. FD withdrawn before maturity is allowed but the payment of interest is subject to Association of Bank Malaysia (ABM) procedures, that is: 1. No interest will be paid on any 1 month, 2 months or 3 months FD that has not run the full period. 2, No interest will be paid on FD of 4 months and above if withdrawn before the completion of 3 months. ‘And other than those mentioned, the rate payable for FD withdrawn before maturity is half the contracted rate for each completed month the funds have been deposited. : : «terest Interest amount on FD is calculated based on the simple inter¢s formula: : Interest amount = Principal x Rate x TimeT deposits ill be paid every six months, es in Malaysia we also have Islamic FD, darabah concept which are offered Ml other commercial banks that Offer I; - interest. It has the same tenor wt in this CASE the bank will act as an entrepreneur and th ie financier. The two Parties will agree on the profit- snnmonly the agreement will be 70 Percent to the deposi othe bank. This ratio however can be changed from ti The Islamic ED uses the al- by Bank Islam, Bank al Slamic depositor as sharing and most me to time. AFD account can be opened by: 1. Individuals aged 18 years and above including Non-residents of Malaysia (external account) 2. Joint individuals, 3. Soceities. Associations and clubs. 5. Companies. The formula used to calculate the profits earned by a customer: Principal x ratex Period of months 100x 12 Profit = ent such as an identity card or driving license or A simple a such as passport is required when opening an any other identi account. he.PERSONAL FINANCIAL PLANNING 5 ifical ill be issued to depositors Deposit certificates wi . UPON Ope, . account. If the depositor wants to renew or terminate the Fp Pi 8 thy depositor can notify the bank before the existing FD Matures, If ie unt, the not notify the bank, the bank will automatically renew the pp” "dog, Example of Islamic FD or also known as Investment Account: lam offers the Investment Account facility to the custo : Goaven profit through their investments. This facility is basa 8 t0 gain Mudharabah concept where profit gained from the investment will Mini between both the provider of capital and the Bank. The profit ratio is at ae which 70% is for the investor, while the remaining 30% is for the Bank. Mining of investment deposit is RM500.00 for any period of investment, imum INVESTMENT IN SHARES Common stock is the type of stock that is sold to the public. A company that needs long-term financing can issue common stock to get the fund. The common stockholders are also known as the owners of the company. It is regarded as the basic residual element of ownership. The holder can exercise the control over the business. It entitles the owner certain Voting privileges and to share the profits. An investor is said to have an ownership in the company if he/she buys that company’s stock. He or she is the owner of the company for as long as the company does not go bankrupt or the investor does not liquidate his position by selling the stock in the secondary market. Buying common stock enables the stockholder to accumulate wealth in two (2) ways i.e. through capital appreciation (if the company’s shares go up in value) and through receiving dividends. In Malaysia there is no capital gains tax and dividends are taxed at the prevailing rate. In addition normally companies pay low dividends and because of this most Malaysia investors are looking for capital appreciation. rave Shares can be purchased either in a primary market that is thou mal Public Offering (IPO) or a secondary market that is the Burs? aysia or formerly known as Kuala Lumpur Stock Exchange (KLSE) 186ChaPrER 7: InvestMenr PLANNING | yest can invest ina reemarket by acquiring the selected shares i ye BU rsa Malaysia. The shares being selected can be on the Main i! 7 second Board through stockbrokers or online purchasing. The gos! poard consists of counters of large and well-established companies 1 second Board consists of counters of small and medium companies. ae categories can be recognized as consumer products, industrial a construction, trading, services, hotels, finance and properties. In order for you to start buying or selling stocks that are listed in the porst Malaysia, you will first need to open two (2) types of accounts: i Central Depository System (CDS) Account CDS is an electronic account maintained by the Malaysian Central Depository (MCD). The CDS account will record whatever stocks you have bought (Credited into your CDS account on due date) and when you sell the stocks will be debited from your CDS account. There is no physical movement of stocks, this is known as scripless trading. nv Trading Account A CDS account alone will not allow you to buy and sell stocks. You will need to open a Trading Account with any of the registered stockbrokers with the Bursa Malaysia. Types of Common Shares Three major types of shares are: . ~are shares issued by leaders in a particular industry 2 uae mae foe vanderd by which other firms are measured or oe ee exhibited a record of solid performance over time. shares that iLestablished firms issue blue chip stocks. The shares Large or === eiaad have increasing earnings from year to year, are stable 1B “consistently and have a high market capitalization. pay Sivek shares are shares issued by Tenaga Nasional Berhad, Examp’ ia, Petronas, Maybank and Maxis. Telekom Malaysia, 187yo PERSONAL Final 2. SL wnciAL, PLANNING Growth shares — are shares issued by companies that cone h and development or are issued by a Company that tate on a 7 The stock is expected to Provig Ped average price appreciation. The characteristics of Such a g Above firstly, these companies either do not pay dividends orpay va ate dividends. Rather than paying dividends, growth com oie Smaly and reinvest the earnings in the company. Secondly, the shan "etain tends to be more volatile if compared to blue chips, Lastly: ce growth shares are issued by small and medium-sized companies are traded over the counter rather than on the stock exch, ange 8 that Sy Oron- ; Income shares — are shares that have high dividend yields, The issues have a long and sustained record of regularly Paying hi ie than-average dividends. Income stock is ideal for those who seek a relatively safe and high level of current income from their investment capital. Examples of such a stock are stocks issued by Hwa Tai, Nestle and Unilever. Features of Common Shares 1. Claims on income — income of the common stockholders are in the form of dividends or capital gains on stock. A dividend can be in terms of cash and/or stock that a company distributes to its shareholders. Cash dividends are paid to all outstanding shares and in cash terms. Claims on assets - Claim on assets during liquidation will be after claims are made by both bondholders and preferred shareholders. Voting rights — since common stockholders are owners of a company, they will have the rights to elect members of the Board of Directo vote on the merger of the company with other companies, authon2? additional shares of common stock and lastly vote on amendments "° the Articles of Incorporation. The shareholders can vote in perso"" by proxy. Their votes will depend on the number of shares that im have. Although shareholders have the right to vote on major oro decisions, the authority to make day-to-day decisions is deleg#" the company’s management team. 188Cuaprer 7: INVESTMENT PLANNING emptive rights — this is related to raising additional capital for m oot The company will have several alternatives in getting the aa and one of the alternatives is by selling new shares. When the a any sells new shares, the existing shareholders are given the right ae the shares before the new shares are sold to new shareholders, By this, the existing shareholders can retain their proportionate ownership inthe company. This is called the preemptive rights. ~ Limited liability - The liability of common stockholders are limited * to their amount of investment. Besides investing in common shares, an individual can also inves' inpreference shares. Preference shares are not common in Malaysia. HK, These shares are not sold to the public but only to the management ofa company. Preference or preferred shareholders will receive fixed dividends ind dividends on preference shares will be paid first before the ordinary/ common shareholders. INVESTMENT IN BONDS Abond is a long-term debt instrument issued by a corporation either public or private to finance the company’s long-term assets. The issuer or the seller or the borrower of a bond has to make periodic be odie erase to i lender until a maturity the bondholder who is also known as the buyer or 1 stage. The issuer also has to pay the principal payment at maturity. The maturity of a bond is between 10 to 30 years. im on the firm’ s income and assets as specified ; The bondholi care is a contract specifying the requirements in the indenture. alaysia, the bond market can be subscribed by retail of the bond. In [ ei “managers such as SBB Mutual Fund Berhad and investors through igs AMBond. Fund managers are the market makers for AMBank subsidi a at Securities and Corporate Bonds. The bond market Malaysian Gomarkel available in Malaysia’s financial market. is the newes! 189i PERSONAL FINANCIAL PLANNING The types of instrument available in the Ringgit Bo fl nd Mark et ate: Malaysian government securities (MGS) are inter issued by the government through Bank Negara Malaysi beating bon government can raise long-term funds from the domestic 7 (BNM), ds finance her expenditures. The maturity of such bonds is seven Mark tt more. The interest is payable semi annually. MGS are rte 7) ye in the secondary market or by BNM. The price is influenoed 2 Actions price list published monthly as well as the demand and supply and rents ailing interest rate. The other types of government bonds are Government Invest Issues (GI). GI are government securities issued based on Tage principles and are placed on a non-competitive tender. It is non-interen bearing to enable Bank Islam Malaysia Berhad (BIMB) and other ioe est their liquid fund on Islamic basis. The maturity is between one (1) to inv les of government bonds are Malaysian to five (5) years. The other examp: Savings Bonds and Khazanah bonds. The private bond market ot private debt securities (PDS) market provides an alternative to bank borrowings. The PDS market comprises of various types of instruments such as fixed rates, floating rates, zero-coupons, convertible/non-convertible and secured/unsecured bonds. ders or investors to have the option of Cooperatives allow bondhol ordinary shares of the issuing company ble converting the bonds into common © at specified times or to hold the bonds until maturity. Non-converti bonds will not have such options. onds are bonds that are issued on 4 Secured bonds or mortgage b any’s specific assets, usually fixed secured basis. It is secured by the comp: assets that have a market value higher than the bond issued. In the event of bankruptcy, the trustee acting on behalf of the bondholders has the power to take over the property and sell the assets. The proceeds will be used to pay the bondholders. pes. The types are Unsecured bonds are divided into three ty, Debentures fi debentures, subordinated debenture and income bonds. 190Chapter 7: InvestMeNT Planning eof bond that is not secured by any speci i . gre attracted to such debt inet toraueone ‘ oe We iqce onl reputable and credit-worthy companies would 7 ne sre. Subordinated debenture is also known as junior debt. enti a vot gholder to get settlement only after all the senior creditors are i eee paid te event of the company’s liquidation. Due to the nature of such claims, re dinated debenture has a yield that is higher than the other forms of pond. Lastly the income bonds have a cumulative dividend feature that limited to no more than three years. The interest payment of the bond depends on the sufficient earnings of the company. The maturity of PDS ranges from three (3) to 20 years. The interest may be payable on a quarterly, semi-annually or annually basis. The PDS market also includes issues based on Islamic principles of Al-Bai Bithaman Ajil, Musyarakah, Ijarah, Mudharabah and Qardul Hasan. Itis best to invest in bonds in periods of falling interest rates because bonds can produce better capital gains. This is because prices of bonds rise when interest rates fall. To protect investors in Malaysia, bonds are rated by the Rating Agency of Malaysia (RAM) and the Malaysian Rating Corporation Berhad (MRCB). With this, it helps potential investors in determining the quality of bonds and safety in terms of timely repayment of interest and principal. The ratings reflect the relative risk of each corporation’s issue. ‘Annual reviews and updates of published ratings keep investors appraise of any possible changes in the credit risk of an instrument. a fer to invest in stocks rather than in ia, most people prefer | be on ee market for stocks creates excitement for stockholders nds} aa et is stagnant and inaccessible to individual investors ane bond eto invest in a bond market, an investor needs a large because in order millions of ringgit. Initiatives taken : thousands to : capital ie, pander through Bank Negara Malaysia (BNM) to by the Malays i i issuing Bon Simpanan Merdeka sans to invest in bonds by issuing i encourage ying to RM2 billion on the 1" of April 2008. The BSM 2008 (BSM) cia principles and is scripless. It is an additional savings ioe citizens who are 55 years and above and not employed jnstrument (O} . ion a full-time basis: 191EE —ie ee : PERSONAL FINANCIAL PLANNING The BSM, which has a 3-year tenure, offers g Tetum of i ibili ion before th Da, rovides flexibility for early redemption re maturi wy mania investment in the BSM is RM1,000 with a maximum ome Th per BSM holder. 0. The issuance of Sukuk Simpanan Rakyat 01/2009 amounting tp billion on the 14th of May, 2009 was another step taken by the M, is government to encourage investments in Islamic bonds, The sy afin scripless and based on Syariah principles. It is an additional inves’ is instrument for Malaysian citizens who are 21 years and above, The RM billion sukuk, which has a 3-year tenure, offers a Teturn of 5% s and provides the flexibility for early redemption before the maturi The minimum investment in Sukuk Simpanan Rakyat 01/2009 ig RM, with a maximum of RM50,000 per investor. @Mnum Features or Characteristics of a Bond 1, Par value — is also known as the face or of a bond which the issuer has to Pay at maturity. The par value ofa bond in Malaysia is RM1000. A bond is selling at a discount if itis sold below RM1000 or below Par and it is selling at a premium if it is sold above par or above RM1000. principal or nominal Value 2. Coupon rate — is also known as the interest rate. It is indicated as the percentage of the par value of the bond that will be paid out periodically (for example: annually, semi-annually or quarterly) in the form of interest. 3. Maturity period — is the length of time until the bond issuer retums the par value to the bondholder and terminates the bond. The maturity Period is between 10 to 30 years, 4. Claims on asset firm’s asset or inc stockholder if the ~ the bondholder will be the first to receive the ome, before the preferred stockholder or commot firm is declared bankrupt. 5. Voting right and fixed income ~ the bondholder receives a fixed income in terms o} i fa coupon rate, which is a predictable and regula! income, but he/she has no Voting rights, ,CyapTer 7: INvesTMeNT PLANNING egtMENT IN REAL PROPERTIES i . investments in shop houses, standard lots in shopping or office Was ; ondominiums ats and residential homes. A ropety market m teresting topic since it will affect us directly or indirectly because i afushas OF will invest in property. Investment in the property market @ important segment in finance because people are willing to give up is : ; : foeg0@ capital sum or big sum of money in exchange for benefits to be ecived in the future such as income flow or capital gain. Investment in property market is an integral part of investment pecause: 193EEE ‘PersONAL FINANCIAL PLANNING capital appreciation by opting for landed Property in 800d log, Landed residential properties offer better potential Teturng for appreciation. ‘ations Capital Who is the developer? What is the track record? 4. To look for the infrastructure. A property which is Surround with good infrastructure will have a better value than one Which « IS remote. 5. To evaluate the sources(s) of financing. 6. To evaluate the real estate cycle or the timing of entry and also exit, We invest in properties because of the returns that we will get, In order to determine the returns, we should look up for these factors: 1. Population growth. Sf nt dat (afr) fm f Inne Au val, 2. Scarcity of land, > . . 4 -) durbea wa 3. Income growth. C (Lp . ~ GQ 4. Economic activities. HY Cowfnalf 5. Supply and demand, 6. Speculation. Next, we need to take into account the element of risks. There are ‘wo (2) types of risks involved: physical and obsolescence, In achieving a 800d return on investment from the Property market, one should be a risk taker and take positions that 80 against the general market sentiment. There are many sources where we can shop around for property: D 5 : deve Normally it will be cheaper to buy a house from @ Per rather than buying from a secondary market. \ 194O'' Oh & CraPten 7; Ivestuenr PLannina ents: This is useful if a) estate a8 WE Want to buy properties j 1 Reon market, agents could advise us on the available choi i ey cal help in making decisions, oe property exhibitions: This can be done through taking advanta of sales for unsold properties at Properties Exhibitions, for exam "6 Malaysian Property Expo (MAPEX) where we can enjoy discounts and free legal fees. Wee also can seek direct contact with devel - and at the same time there will also be Tepresentatives from banke the exhibition for financing advice, 4, Others: Refer to classified advertisements in the newspapers or we can refer to property for auction. Bank Islam offers the Shop and Shop House Financing facility and itis based on the Al-Bai Bithaman Ajil principle. The financing is given for completed shops or shop houses or even ones under construction. The financing amount is up to 90% of the cost of purchase for new shops or shop houses. The duration of financing is up to a maximum of 20 years or maximum age of 65 years old, whichever is earlier. The advantages and risk of investing in residential properties are tabled as below: Table 7.1: Advantages and Risk of Real Properties Investments Advantages Risk Expenses including depreciation on the Interest rate could rise property and interest on borrowings are tax deductible ney as the value of the | The property could be untenanted for mo Make P a period of time and may get a bad property increases tenant Prices could remain static or even fall investment Leverage the inv (Rental Income he past few years, the properties market was uncertain in Malaysia Bs ee a few factors such as political issues, a slowdown in economic caus! > “——— er = Persona. FINANCIAL PLANNING and increase in fuel price. These reasons could have | for their own stay. With effect from Is Peony was made by the Prime Minister. Dan Dri » Dato’ se, activities buying properties mainly 2007, the announcement : h Abdullah Ahmad Badawi on exemptions given to the Real Proper Tax (RPGT). More people would want to buy properties for invest ing and take the advantage on the exemption of real property gains tax et on properties. However, the return of speculative Property investorg i lead to a vibrant property market. The waiver on the real Prope Ould tax would have a positive impact on the take-up rate for al] Propert; encouraging investment and bring more liquidity into the market, ties RPGT was introduced in Malaysia 30 years ago, as the only Capital gains tax in Malaysia charged on gains arising from the disposal of real property or any shares in a real property company. A comparison on the RPGT before the exemption given with effect from 1st of April 2007 jg as below: Table 7.2: RPGT Comparison BEFORE AFTER Term of disposal Company | Individual | Exemption Apply to Rate Rate Co. And Individual Disposal within 2 years 30% 30% NIL after acquisition Disposal within 3 years 25% 25% NIL after acquisition Disposal within 4 years 15% 15% NIL after acquisition Disposal within 5 years 5% NIL NIL after acquisition Disposal within 6 years after} NIL NIL NIL acquisition or thereafter Tide epE CEES Soma a 196CHAPren 7, eset Py wing, ye 71° urchased for RM100,000 on the 318t se 125 Pine 30th June 2002, after holding it senuary 2000 ad sa fy io gery gains tax payable by you will be i Years ang 5, ne i — purchase price) z (selling price — pure! x tax rate APT = “BN150,000 — RM100,000) x 2594. RM12,609 from 1st April 2007, the amount of tax payabi wt exempted. But effective from 1st Jan 2010, the Prime wee a , M ma ib Tun Razak announced that the RPGT is five ri disposal year. Individuals who are not citzes "cent irrespective of ine pere are subject to 30% tax rates, wT TRUST foe foe LL oe 0 ; uaho (ite Lr aye, Yurr Oy ttre ; hit trust is a trust that is established by a trust edt fea between an investor (client/unit holder), a fund manager and hase The objective isto get a certain level of return and with an acceptance level of risk. It is $ a investment in which the funds are pooled and then invested. The fund ] é is"unitised" and the investor/unit holder, holds a certain number of units. 5 Asecond party, the manager, is responsible for the day-to-day running of : the trust and for investing the funds. The trustee, who is governed by the Trust Companies Act 1967, is ] ‘o monitor the manager's performance against the trust's deed. The deed j outlines the objectives of, and vital information about, the trust. The — nite trust are held in the name of the trustee; they are iia le unit holders. In general, small, busy and inexperienced investors will dit attractive to invest in unit trusts. ive i d that Off a Islamic Unit Trust Scheme is a collective pane no 7 rah tors the opportunity to invest in a ee dis eed Profs *Pproved capital market instruments. The 7 _ aed i i ariah, ; Syari ssional managers in accordance with the — peations are i ‘Corda “ommittee or Syariah advisor to ensure Ty, <° With Syariah principles. Yu ue . hy fats ewe VOCE PO gh GPM opp boro MANS. fred wath guy i i a 19%) aw mtr . = fre hon 1 Ay BAGPeasowa. FINANCIAL PLANNING Methods to invest in unit trust: Monthly regular saving scheme. Lump sum cash. EPF withdrawal from Account 1. \«x Factors to be Considered when Deciding to Invest Ina Trust Unit 1. Evaluate the unit trust you are investing, know the porto} up of the fund, note whether the funds categorized by — ; geographical location or sectors? It is recommended to hayes diversified portfolio. © a wel Understand your risk profile and decide whether it js Suitable § you. for Evaluate the track record of a fund manager. Look at the cost of operating a unit trust fund or check the expense ratio (the ratio of cost of operating the fund to the asset value of the fund). How much you are paying the fund manager? Check the annual management fee. Check on reports on investment outlooks. Make sure to read the prospectus. Continue to review the fund manager performance by reading the reports. 198we. Moto. e Cunpren 7: InvesTMeNT Puannina Types of Unit Trusts 1. Conventional Unit Trust (a) Equity Funds equity unit trusts, availa with higher risk with higher returns to fund: lower returns, (i) Aggressive growth funds These funds are invested generally in companies with a a Capital growth potential but with associated higher risks. teu (ii) Index funds These funds are invested in a range of companies that closely match (or “track”) companies comprising a particular index. tg (iii) International equity funds These funds are invested primarily in overseas share markets. (b) Fixed Income Funds These funds are invested mainly in MGS, corporate bonds, and money market instruments such as bankers’ acceptances and fixed deposits. The objective of a fixed income (or bond) fund is usually to provide a regular income, with less emphasis on producing capital growth for investors. It is possible, however, for fixed income funds to generate both capital gains and losses during a period of volatile interest rate. 199| i \ Pensonat FINANCIAL PLANNING (c) Money Market Funds @ ) (f) Money market funds operate in a similar Way toa bank the unit price is normally set at a fixed amount. Mone Count, funds are invested in low risk money market instruments a et in effect short-term deposits (loans) to banks and other-fo at are financial institutions, and in short-term government g ome 8, Real Estate Investment Trusts (REITS) REITs invest in real properties, usually prominent Commere; (office) properties, and provide the investor with an opportuni to participate in the property market ina way which is normal impossible to small-time investors. By acquiring units in a listed REITS, however, it is possible to invest a small amount to gain exposure to the property market and have diversification in your portfolio. Examples of REITS in Malaysia or Malaysia REITS (M-REITs) are Amanah Raya REIT, Healthcare REIT by the KPJ Healthcare group, SWP REIT by Landmarks, CapitaLand, and AXIS-REIT (first REIT company successfully listed on Bursa Malaysia in August 2005 whilst YTL Corporation's Starhill REIT and UOA REIT were listed respectively in December 2005). Examples of Islamic REITS on Bursa Malaysia are Al-Agar KP} Healthcare REIT (hospitals) and Al-Hadharah Boustead REIT (plantations). Exchange Traded Funds (ETF) ETF is a linked unit trust fund whose investment objective is to achieve the same return as a particular market index. The ETF often have low expense ratios and can be bought and sold throughout the trading day through a stockbroker, on an exchange Balanced Funds ji Some investors may wish to have an investment in all the major asset classes to reduce the risk of investing in a single asset class- A balanced unit trust fund generally has a portfolio comprising equities, fixed income securities and cash. 200Cinpren 7: Investuep : WT P, Syariah Funds Send The main objective of Syariah funds isto provide an alternatj for investors sensitive to Syariah Tequirements, Syariah avenue exclude those companies involved in activities, product ‘unds will related to conventional banki FS OF Services . ' Ng, insurance and financ; ; gambling, alcoholic beverages and Non-halal food prose fi example of this fund is CMS Islamic Fund; which is a bj ! # Which is a high risk hj return growth fund with 90% of its Portfolio invested in wien of halal securities, adhering Strictly to Syariah Principles, * Tust will also avoid the incidence of Process of, Cleansing or Purification by the removal of such amounts Tepresenting the interest element. Such proceeds are Normally donated to charities, , Costs and Returns of Unit Trusts 1. Unit trust costs . There can be a number of costs involved in owning unit trusts, including entry, transferring (switching), on-going and exit costs. : The entry fee generally covers the Commission for selling the unit . trust to the investor, with its associated costs: for example, the cost of the administration which relates to having that investor as part of the ‘ fund. These costs vary considerably, depending on the asset invested . in, the fund manager and the amount invested, Most fund managers will let you transfer your money between funds. Check the paperwork, but you should expect to be able to do this freely, unless the fund you are moving to has a higher entry fee than the fund you are transferring from. There are generally three on-going costs: (a) The annual fee paid to the investment manager to cover investment and administrative activities. 201————_—_—_— i) | PERSONAL FINANCIAL PLANNING (b) Service or trail commission paid to the financial adviser (c) Annual fee paid to the trustee. Some unit trusts may also charge an exit fee; therefore, You m check the investment statement for details. If an exit fee js char, it usually relates to redemptions that you might make in the frst fey, years of the investment. st A useful way to measure the overall cost structure of a fund jg With the Management Expense Ratio (MER). The MER is Tequired to be disclosed by members of the Investment Savings and Insurance Association. By excluding "expenses ordinarily incurred by a Person who directly invests in assets equivalent to the underlying assets of the Fund" shows the cost over and above of what you would pay as a direct investor. It is a method by which you can compare the different cost structures of competing funds. 2. Returns of unit trusts The return on your investment is probably the most crucial part of your decision-making criteria. In assessing the future returns of a fund, the best place to look is at the returns that a fund has already achieved. You must consider funds that have a record of at least five years of returns, if possible; understand if the returns are after tax and/ or expenses, and review what the ratings companies have to say about a fund and its manager. Advantages of Unit Trust 1. Diversify the risk Risks can be diversified since the investments are spread over large number of financial assets. The fund may not only be invested in Malaysia but it can also be invested in overseas markets. 202i) Safety and less Monitor; In, Cimeren 7.5 ; Ie Orh0 py Unit trust funds Managed ron The fund Be one manager Will w : Ofegs, tentive mo} itorin n Mlensive res 1Onal make Investment decisions ih NOMmic ang an e Minimized risk Investing directly 1 the stock compared to investin inunity * exposes yoy to you with an alternative inv TUSt. Invest j Investors can Chor sl Ose based 5 at has a | i Fecommendation from the «ot Preference. The sy ee tsk, e ex, more relevant and less tisky, © Investment become Liquidity ig ask and bid prices at any time. This provides us with the benefit of liquidity. Advantages of Compounding Many unit trust funds Provide facilities for investors to reinvest their distributions. For those who opted for distribution reinvestment, the fund will be automatically credited into the investor’s account, rather than receiving distribution warrants. This process of reinvesting the income from the original investment and also of reinvesting the return On the total accumulating investments is called compounding. 203PERSONAL FINANCIAL PLANNING 6. Lowcapital requirement The initial capital required for unit trust investment is relat) and affordable to small investors. "ely hoy Disadvantages of Unit Trust 1. Lack of publicity with the public or customers, publicity is very im, mation to target customers. Accurate informa lon When dealing tion to make investments. in order to send info will attract their atten 2, Lack of experience d manager, we must make sure the When dealing with the fun information given by them is based on actual research and analysis Fund managers with lack of experience and expertise will affect the trust of their customers. 3. Lower return may get lower retums in the unit trust, investors in the stock market. This is because when lot of expenses in order tors may pay 4 I This may reduce the returns to the When investing il compared to investing i investing in a unit trust, inves to buy and sell the unit trust. investor. OTHERS d Fund Board or Tabung Haji joney. The Pilgrims Pilgrims Management an: Urusan dan fs ‘As Muslims, we have this option to invest our m Management and Fund Board or also known as Lembaga Tabung Haji (LUTH) was set up by the governm coordinate activities for Muslims going for Haj. Besides this, LUTH enables | Muslims to have active and effective participations in inves! 204y Churten 7 Movestuent Praronne ermissible in Islam through their cay: IT savings, TI aa uoted and unquoted Corporate Securities im 7 . S includ and associate companies, short-term invest ‘Stments le shares of 5 ubsid ry ; tay I stment Mcate, Islami Sand other | Certificate, Is ‘amic bonds d other iq mainly in Government Uid assets, LUTH exercises an extrem activities and ventures. Decisions and lengthy deliberations to ensure brings in good returns. lev i re a Of prudence in its investment the ly made after massive groundwork €ach investment Venture and activi ty Cooperatives Another option for investment is to Not all cooperatives allow us to be m cooperative is established for specific r jecti cooperatives in Malaysia are Bank Kerjasama Raby ' eat fat Rakyat), Koperasi Permodalan Felda Bhd and Koperasi yee = Malaysia (KATM), each with more than 65,000 members shard ena exceeding RM100 million, and assets of over RM400 million, _ Put our money in Cooperatives. embers. This is because each 7 A cooperative is an organization formed and owned by a group of individuals for the Purpose of improving its standard of living and enjoying the social services rendered rather than for profit maximization purposes. An example of a cooperative is Bank Rakyat. In 1967, Bank Kerjasama Malaysia Berhad replaced Bank Agong with its membership opened not only to the cooperatives, but also to individuals. Subsequent changes in the by-laws also resulted in the creation of its subsidiary companies and opening of branches to serve customers as well as members. On the 6" of January, 1973, the name was changed to Bank Kerjasama Rakyat Malaysia Berhad or better known as Bank Rakyat. On the 8" of May, 1993, Bank Rakyat took a giant step towards becoming a Syariah cooperative bank by introducing Islamic banking products. Bank Rakyat became a full-fledged Islamic cooperative bank in 2002. rn hut 5 \ aww N = Buty carved fly pe men _ Gp to GANA OLA [pyrn) _ fire mag we pg |rel ad 205Personal Financia. PLANNING SUMMARY In order to invest, a certain amount of money should be | every month. Investments should begin as soon as possiby ed lor; until one is old. Investments should be done regularly ang " Mot ae allocation is needed. The right asset allocation depends on th © Tight aie horizon, investment objectives and risk tolerance. In petion Vestn planning, a sound investment plan is crucial. This is importants Financia earn more money from an investment. The biggest risk is to lose Order 4, to earn such returns. There is always an element of risk associa € abj investment being made. ted lity toan Question 1 It is important to choose a property that matches your investment objectives Do you agree and why? " Question 2 Encik Hashim had a negative experience with the stock market. He wants to earn more than the traditional bank accounts have to offer. Some of his friends are excited about the bond market. He has had some misconceptions about diversification, income, safety and interest rates. Now that he has some funds to invest, we must give him some sound advice. 1. Describe to him five (5) advantages of buying bonds. 2. How would you go about rating bonds as a possible investment? 3. Explain also to him the dangers present in bond investing. 4. Besides investing in bonds, what other investment alternative would you recommend to him and why? 206