Unit Trust 101

Yesterday, I had an interesting discussion with a few colleagues of mine regarding 'Unit Trust vs Stock'. The discussion was centered around which one is better in term of long-term accumulated wealth, associated risk as well as the potential growth of each sides. At the end of the session, none of us won the debate as we all agreed that it depends on our risk tolerance and our financial goals :) 

Well, before I write about those topic, allow me to explain what is unit trust, how it works, how to calculate the potential return and risk associated with this type of investment. A clear understanding of these element is a must for future newbie investors like myself. 

What is Unit Trust?

As far as I understand, unit trust is a collective fund that allow small investors (like me) to pool their money for investment purpose. The fund then will be managed by the so called professional manager to invest in various portfolio in accordance with the objective of the fund ie bond, property and stocks. For those who are familiar with ASB, it works the same way (well, ASB itself is an unit trust), but differ in term of movement of the price (and of course its risk and rate of return). 

Type of Unit Trust Fund? 

There are several major type of UT funds including: 

• Bonds : funds that invest in Malaysian Government Securities, corporate bonds, and fixed income; 
• Real Estate Investment trust: funds that invest in property, mainly commercial property. Allow those with 'less' money to participate in property investment
• Equity Fund:  investments is focussed in shares/stock of listed companies. The performance of this fund is heavily related to the performance of the companies

How to Calculate Unit Trust Return?

Lets say in 2011, you invested RM10k to buy XYZ unit trust, each costed you RM1 per unit. That means you had 10k unit. In 2013, the manager's buy price doubled the initial price that you bought. So, the value of your unit trust = 10k unit * RM 2 = RM20k. 

Gross profit would be: (RM20k-RM10k)/ RM 10k = 100%

ROI per annum: 100% /2 years = 50% 

How do fund managers determine the buy price?

-Demand and Supply / profit (I need to study more on this question)  

I will continue in my next post regarding the risk associated and how to minimized the risk. 

Rich Dad Poor Dad

Tittle   : Rich Dad Poor Dad 
Author: Robert T.Kiyosaki 

The book entitled "Rich Dad Poor Dad" outlines the difference between how the rich, the middle class and the poor think about money and investment, and how a clear definition of assets, liability as well as cash flow could make huge differences in influencing ones financial decision. The author describes the differences by illustrating how his rich dad taught him how to get rich and how his poor dad, even though decently educated, was struggling to meet the end needs. The book explains that most of the time the rich acquires asset, while the poor continues buying liabilities. 

The most interesting concept that the author highlights is the importance of letting the money works for you, instead of us working hard to get money. The author states that people will not get rich by just working a 9-to -5 job. Instead, the author advises to keep the expenses low, reduce your liabilities, and diligently build a base of solid asset. Rich people buy luxuries last with income generated from investments, while the poor and middle class buy them first. 

Comments :

As a novice to the field of investment, I find the book very motivational and encouraging. Taking notes of the criticism that coming along with the book, I read it with open mind and receptive to positive suggestion. It has technically strengthened my ideas towards money and investment. The author manages to clearly point out the norm practice of the 'poor' people. Buying big cars to get the bragging right has became a lifestyle of the young generation. Well, some said that that they require the expensive car mainly due to our bad public transportation, but I beg to differ. People just make an excuse out of it.

Having said that, the book is meant for those who are looking towards fundamental of investment or want to get some rough ideas on investment rather than a how-to guide toward investment. The book doesn't explain how to buy real estates, what the criteria to look for in buying shares and stocks and neither the book properly states how to do business. Nevertheless, I would recommend the book to everyone out there as the book could shift the paradigm how to live a proper life, if we are open to change our way of life. 

How to become a McDonald's restaurant operator

KUALA LUMPUR: So you want to be a McDonald's franchisee?

Golden Arches managing director Sarah Casanova said for starters, the franchisee must have a passion to be a full-fledged restaurateur.

"You cannot be a silent investor, where you dump in the money and let others handle it for you. It doesn't work that way.

"If you want to invest, go buy McDonald's Corp shares," she remarked.

Casanova said the potential franchisee must undergo train-ing between nine months and a year and only then will the franchisee discover whether the McDonald's lifestyle is for the candidate.

The candidate must be of high integrity, a real people person, with high energy and willing to relocate anywhere in Malaysia and be part of the McDonald's three-leg stool system - McDonald's, supplier and the franchisee. 

"Any one of the leg breaks ... the stool will fall," she said.

For funding, Bumiputera candidates may work with Perbadanan Nasional Bhd for financing, which range between RM1.8 million to as high as RM6.5 million, depending on location.

As a general guide, no less than 30 per cent of the cost must be funded from non-borrowed personal resources while the 70 per cent can be sourced from Perbadanan Nasional Bhd or local banks.

Casanova said Golden Arches currently has 17 franchisees owning 35 resturants in 2011. 

For 2012 it targets five new franchisees, and ultimately by 2016, out of the 400 outlets, half will be operated by franchisees.

Starting with its first McDonald's outlet in Jalan Bukit Bintang, Kuala Lumpur, Golden Arches currently operates 84 McDonald's delivery services hubs and employs 11,000 workers.

Source: How to become a McDonald's restaurant operator http://www.btimes.com.my/Current_News/BTIMES/articles/casnov2/Article/index_html#ixzz1kM0Bstwh

ASB Loan Vs Traditional Deposit to ASB Account

How to Calculate Dividend 

Before I go further to explain pros and cons of ASB loan, let me clarify how the dividend is calculated. As some of you are aware, the dividend is computed monthly based on the minimum amount of the month but distributed annually. 

Example

Assumptions : 

• You have had RM500 since the 1st January 2012
• 7% dividend declared by PNB for the year of 2012
• no bonus is given

Dividend for January:  0.07/12 months *  RM500 =  RM 2.92 

Let say you put additional RM 400 in Feb: 

 

Dividend for Feb: 0.07/12 months * RM (500 + 400) = RM 5.25

In March, you forget to add money, so : 

Dividend for March: 0.07/12 months * RM (500+400+0) = RM 5.25

And the Calculation goes on for the next months. Thus the annual dividend for the year of 2012 would be: 

Dividend for 2012: RM 2.92 (Jan) + RM 5.25 (Feb) + RM 5.25 (March) + ............

Hope you guys could understand the above calculation. It is simple, yet many people get confused. Now lets go to the next issue which is ASB Loan 

ASB Loan 

At this stage, I'll just point out reasoning only based on  numerical advantage. Using the above formula, I've calculated the traditional way of saving money into ASB vs using loan; 

Assumption: 

• 7% dividend + 1% bonus every year for the next 25 years
• Rm600 payment monthly till reach quota RM 200k (for traditional way)
• RM600 payment monthly to loan (RM100k) for 25 years (for ASB Loan). Rate BLR-1.65

After 25 years: 

Traditional: RM 456K

ASB Loan: RM 675K

You may wish to note that I didn't deduct the total amount of money at the end of the 25 years for the ASB Loan with the total payment to the bank in which in this case is RM 600 * 12 months * 25 years =  RM180K. Some people may argue that we have to deduct it because we pay it to the bank ( other words is enrich the bank). Well, I beg to differ. You may notice that in the assumption above, I put some italic and bold on the 'payment' word. Yes, we pay to the bank for the loan. However, we also pay to the ASB to invest our money. See, it is the same thing! We PAY, so why is there a need to deduct the RM180K? 

However, in my calculation for the traditional way, I stopped putting money into the ASB account in my 15th years because it has reached the quota of RM200k. So that means, for another 10 years, I didn't pay any money which is equivalent to RM 600 * 12 months * 10 years = RM 72K. 

So yea, we have to deduct that 72K if we want to compare with the end amount of using ASB Loan; 

so the end amount of using ASB loan = RM 675k  -72K = RM 603K, which is still RM150k higher than the traditional way. 

Thank you, 

Yours Sincerely, 

Nama Saya Amad. 

Edit: Found the ASB dividend calculator at irwan.biz. Click Traditional way for calculation using ASB calculator for traditional way and ABS Loan for calculation using ASB Calculator using ASB Loan. 

ASB = Skim Cepat Kaya?

My case study today will be covering one of the low-risk investment methods called Amanah Saham, specifically the  Amanah Saham Bumiputra (ASB) since it's the oldest compared to ASN, ASW and etc . Why did I mention it is a low risk? Because these types of investment are backed by the Malaysia government, and will guarantee return of investment more or less 6%-7% per year. Well, it's not much, at least better than fixed deposit and could safeguard your hard-earned money from becoming the victim of inflation.

Ladies and gentlemen, let's look at the past performance of ASB (as our benchmark) and do some background check on it. 

ASB Performance in term of Divident and Bonus from 1990 - 2010 

YEAR	ASB PERFORMANCE		BLR
	DIVIDEND	BONUS
2010	7.50	1.25	6.30
2009	7.30	1.25	5.55
2008	7.00	1.75	6.00
2007	8.00	1.00	6.75
2006	7.30	1.25	6.00
2005	7.25	1.75	6.00
2004	7.25	2.00	6.00
2003	7.25	2.00	6.50
2002	7.00	2.00	6.50
2001	7.00	3.00	6.75
2000	9.75	2.00	6.75
1999	8.50	1.50 + 2.00	8.00
1998	8.00	2.50	10.5 – 12.27
1997	10.25	1.25	9.25
1996	10.25	3.00	8.50
1995	10.00	3.00	6.60
1994	9.50	4.50	8.25
1993	9.00	4.50	9.50
1992	7.50	5.00	9.00
1991	8.50	4.00	7.50
1990	8.00	6.00	7.00

I got the ASB performance table as stated above from here  Of course the author of the blog didn't quote the source of the information, but I do double check with some forums and blogs, and it's pretty much the same thing. For the sake of our discussion, I would not question the accuracy of the number given but what more important is the trend of the performance. The dividend for the year of 2011 was 7.65% + 1.15 bonus  

Based on the data given, from the past 20 years, the dividend paid by PNB to the investors never fail to reach below 7%. I can't recall any other avenues of investment such as unit trust, forex, property or stock that that can perform as consistent as ASB. Without taking into account the bonus, in which it has a different way of calculations, we can safely assume that our return is pretty much guaranteed!.

My next writing would be about ASB loan vs traditional deposit into ASB Account. Stay tune 

Diversifying Your Investment Folks!

Ladies and Gentlemen,

When it comes to investment, I ain't the right person to speak or write about it. You might be aware that I have no experience whatsoever in this field. Nevertheless, I do feel the need of all of us to put our money in the right place to maximize the profits, unless you want your hard-earned money to lose out to inflation.

After reading some blogs, writings and materials over the net on this topic, it is safe to conclude that our investment portfolio represents our true self, in term of who we are and the risk that we are able to tolerate. As a newcomer, ones should realize the risk that we face such as the possibility to lose some, or all of the money we put for investment due to uncertainty of the market direction, or can be summed up as the chances to lose money. In term of risk involved, lets classify the avenues of investment into several groups;

• Less Risk, Low return such as Fixed Deposit and saving account;
• Less Risk; Medium return such as Amanah Saham by PNB for example;
• Medium Risk, Medium return such as Unit Trust;
• High Risk, high Return such as stocks, and property;

Folks, of course the way I put all the avenues of investment as per above mentioned group is subjected on how we determine our Return of investment (ROI). Ones could say that 6%-8% of ROI per year is low to their standard due to the inflation rate in certain countries and the other way around. Well, the general rules of thumb that we need to understand is there is no such thing as free lunch. What I meant to say is everything doesn't come cheap, there is no investment that has low risk but could produce 20%-30& of profits per year.

To conclude my post, remember remember, invest something you could afford to loose.