first of all, this informative write up is copied from Tuan Arif's blog - arifismail.com
I found this one very useful and he concluded in one write up. Please feel free to enjoy read this one during your leisure.
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The first and the most important thing for you to know about unit trust investment is why you invest. What is your objective? What is your investment need? This is the basic.
Many people when asked to invest, they just look into the potential profit promises by their unit trust consultant, then without a second thought they jump in. They don’t consider the time frame, their own risk profile and they don’t even know what the long term plan for their investment is. It is just a matter of getting more money or because they are being push by the consultants or peers.
Thus, when their investment does not show a good return in the short term, they start thinking that the unit trust investment is not good for them. Then, they shy away from the investment. This is mainly because the investor does not know why they invest and do not understand the principle behind unit trust investment. Part to be blamed is the unit trust consultant that doesn’t educate their clients.
Among the objectives that you must know in investing in unit trust are:
• To grow your money for your children education, your retirement, your EPF, performing haji and umrah, starting up a new business, buying a car and a house or even for your marriage
• To hedge the rising inflation rate that is reducing the value of your money over time
• To leverage the principle of rule of compounding, where if you invest the money over time, the money will increase in a quantum. It multiples over the years. But if we put the money idle, then the money won’t increase. In addition it will be eroded due to the rising inflation rate
Example 1 – Your retirement fund
What is the purpose of your retirement fund – money to finance during your retirement age. Do you think you have enough money on the day you retire where your income stops?
Look at the illustration below. Assume that you are 35 years old now. You are going to retire at 55 years old. Statistics from Bank Negara Malaysia shows that average life expectancy of Malaysian is 75. So you have 20 years to earn before retire and you have 20 years to use the money without income before you go back to see your Allah.
If your family expenses now is RM5,000 a month and you believe that you need that same value of money when you retire another 20 years. By calculating the inflation rate of 4% (published by BNM) a year for 20 years, your RM5,000 value now shall become RM10,955 in the next 20 years. Waaa.. I don’t believe it, you may say. I prove it to you. Nasi lemak now is RM1 per pack. It was RM0.50 in the last 20 years. Right or wrong…
The rule of thumb is that for the next 20 years almost all the goods will have double their price now. If teh tarik is RM1 now, then it will be RM2 in the next 20 years. Similarly, if you think you need RM5,000 now, then you need RM10,000 later in 20 years for the same value of goods and services.
If you calculate that RM10,000 for 20 years (20 multiply by 12 and multiply RM10k) that you don’t have the income flowing in, you will get RM2.4 million. And this is the amount of money you need at your 55 years old if you don’t want to find another job after retired or you don’t want assistance from your kids or Jabatan Kebajikan. Aiyoo.. RM2.4million, so huge. Who has that much of money? Jabatan Kebajikan also can become bankrupt.
Now, if you say I need half of that actually, because I have settled my housing loan and my car loan. So we halve the RM5,000 and it become RM2,500. RM2,500 for the next 20 years with 4% inflation rate shall equal RM5,477. That is your monthly expenses you need. You multiply it by 20 years and 12 months, you will get RM1.3 million. OK, this looks better. But the question again is, do you have that much of money at 55 years old? How much your EPF will be at that time? EPF says that in average people at 55 have RM200,000 in their Account and it finish within 3 years after they retire.
So, this is one of your objectives to invest in unit trust so that you can fatten your EPF money at 55 years of age. Even though you have the EPF of RM1million, you still need an additional RM300k so that when you retire, you are actually retire without going to work again.
Example 2 – Your Child Education Fund
Let say you have a 3 years old child at home. Assuming you want to send him to a local university when he reach 18 years old. The cost of entering a private university is expensive. It is about RM20k a year. For five-year course, it will be RM100k.
How do you raise the money if you don’t want your kid to borrow from PTPTN if it exists in the future. To think that oh… I will have that much of money when I need it without preparing it, is a wishful thinking. So how do you that.
This is why you need a vehicle like unit trust to grow your money. You can look at the illustration below:
You have 15 years to save the money. If you start by saving RM100 a month for your children, you will have an accumulated RM18,000.
Imagine if you put the same amount of RM100 into unit trust a month, with an average return of 12% (industry average), you will get RM50,458 instead of RM18,000. Can you see the big difference. A different of RM32,458. It is like a Perodua Viva price. If you want it to be RM100k, then you must double your savings to RM200 per month.
Which one is practical and easier, putting RM200 monthly or wait until your child become 18 years old, then you raise the RM100k within a month. It must be RM200 monthly right. This is your objective, to save money for your child education so that they can go into university like any other people.
Example 3 – Your dream to have a million in your account before retire
Many people have a dream of having one million RM in their account. This is made possible if we apply a Malay proverb “sikit-sikit, lama-lama jadi bukit”. By leveraging the unit trust funds, if we put RM200 a month for 35 years, our money will become RM1.2 million. Again the assumption is that the annual average return is 12%. I know you may say ooohh… that is very long, by that time I am 70 years old. One of my friends said, yes you are already old, but the difference is whether you have that RM1.2 mill or you don’t have. And let say you are no more in this world, you can always give for charity, your wife, your kids etc and that will become your sedeqah and amal jariah. Sometime because we think only for ourself, we forget to save for other people that are in need for our help in term of money.
If you want that RM1mill faster, than what you can do is to increase the monthly savings as per your target. If you target that you want it in the next 20 years then you must save at least RM1010 a month for 20 years.
Example 4 – Your Umrah and Haji Plan
Similarly, you can ride unit trust to plan for your umrah and haji. From the table above, you can see that if you keep RM100 for 6 years, you will accumulate RM10,576. That is enough for your haji. And if you put want to go for umrah, you save another RM100 for 5 years which will give you RM8,249.
So there are many objectives and plans you can create for your financial needs.
Tips for achieving your financial objective is to start early, do not procrastinate because time is running very quickly without you know it. From one month to another is very short. Remember, from one Friday to another. It feels just like yesterday.
And what is the value of RM100 you save if you don’t put it in unit trust. You can only buy 2 packs of diapers for your baby. Or for smokers, may be you can buy 10 boxes of cigarettes. But imagine what this RM100 can provide in the future for your financial needs. RM1million…
These are the examples of your objectives. If you understand your objectives very well, say for your retirement plan, it doesn’t matter whether the market ups or down because you want to grow your money for another 15 to 25 years. And you know historically if you plot a graph of KLCI, market has never gone down in that long time frame. Therefore you don’t need to panic if the market fluctuates in between your investment horizon.
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call me / whatsapp 0196739261
Tasha.unittrust@gmail.com / natashabaharom@gmail.com
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