Tuesday, October 21, 2008

Don't Rely On Your EPF

Many Malaysians believe their Employee Provident Funds (EPF) savings can fund their retirement. This is unrealistic. By relying solely on your EPF savings, you underestimate the amount needed to retire and overestimate how much you can withdraw once retired.

Malaysia’s pension scheme is meant to provide contributors with the basic necessities. Unless you plan to make drastic lifestyle changes after you retire, there is a big chance of exhausting all your funds in just a few years, with escalating living costs and increased longevity.

Living on a quarter of your income

The amount that we have in our respective EPF accounts depends on how much we make. For salaried employees, the mandatory contribution rate to the country’s pension fund is 23% of the employee’s monthly salary; 12% is contributed by the employer and the rest is deducted from the individual’s pay. At age 55, contributors can opt to take the sum along with annual EPF dividends declared to finance the rest of their life. Any withdrawals made before this age, such as to buy a property or pay for medical and educational expenses, will reduce the amount that you receive at retirement age.

All things being equal, with a monthly contribution of 23%, those relaying solely on EPF funds for their retirement will have to live on slightly less than a quarter of their current income every month. Is it possible to live frugally on this sum?

Even EPF officials have consistently highlighted the need for contributors to supplement their retirement funds with other sources of income. According to Deputy Finance Minister Datuk Seri Ahmad Husni Hanadiah, the average Malaysian will have approximately RM120, 000 in their EPF account at the age of 55. This amount provides the retiree with RM500 a month to live on for 20 years. While it can be argued that this meager sum can be stretched to provide for basic necessities (families earning this amount are classified “hardcore poor” and are eligible for government aid), it is not sufficient to provide for those that live beyond the age of 75.

Inflation Surpasses Returns

Inflation is another reason why you should not depend solely on your EPF funds for your retirement.

Inflation pushes up the cost of living. At the very core, inflation means we have to pay more for the same amount (and quality) of goods and services consumed. It eats away the value of your EPF funds. For example, a yearly 5% dividend declared by EPF translates to a real return of 1% if inflation for that particular year averages out at 4%.

As shown in Table 1, the EPF’s annual dividends have been just slightly more than the country’s inflation rate, which is measured by the consumer price index (CPI).

Table 1: EPF and CPI





EPF Annual Dividends










*Bank Negara’s estimate
Source: EPF and Bank Negara

However, one criticism of the CPI is that it does not reflect the actual consumption patterns of different regions and different income groups. This is could be due to controlled prices for a generic brand of several items in the CPI’s basket of goods and services, including cooking oil, white bread and rice. Controlled prices do not reflect actual market prices paid by the majority of Malaysians, especially those living in cities.

Revisions to the CPI basket are also infrequent - the last revision was in 2005. Recognising these shortcomings, the government reportedly reassessed the composition of the CPI and is considering publishing separate inflation rates for urban and rural areas.

CPI is also a poor reflection of inflation experienced by individuals. In June 2008, the CPI jumped to a 26-year high of 7.7%. However, in reality, most people experience a jump in prices that exceed 7.7%. It is more likely that the good and services purchased, especially in the urban areas, reflect the 40% increase in fuel prices and the 18% increase in electricity tariffs.

As more and more producers start passing down rising transportation cost to consumers, we believe inflation will continue at higher levels for some time. This will eat into the value your EPF savings, especially if annual returns declared for this year do not surpass 5.7%, the estimated inflation rate for 2008.

What Can Be Done?

The first step is to stop depending on the EPF. Take responsibility for your retirement and invest with a clear goal in mind. The objective is to invest in assets such as equities that have historically been able to provide inflation-beating returns.

To get started, here are some tips:

1. Invest now.
The sooner you start investing, the sooner you start building your wealth. Take a long-term view and invest small sums over a long period.

2. Take a look at how much you will need to retire.
This is, at best, a guesstimate of the expenses that you will incur when retired. Aim for a higher percentage of your current income, for example 65% to 80% of what you are earning now to sustain the same lifestyle once you stop earning.

3. Diversify.
This can be easily done with unit trust funds. It is possible to invest your EPF funds in approved local funds but your selected investments must make better returns than EPF’s annual dividends. However you still need to diversify your portfolio with different asset classes and geographical coverage.

4. No matter what happens – whether the market falls or climbs - always keep retirement as a financial goal and stay invested.

Thursday, October 16, 2008


There are many different types of unit trusts but, in general, they can be categorized as below:

  • Bond and Money Market Funds are funds that invest in fixed income securities (which are long-term debt) and in short-term debt (for example, commercial papers) respectively.
  • Balanced Funds (a mix of equity and bonds) are funds which have a good combination of both debt and equities (stocks) in the portfolio; the asset allocation is normally on a 60:40 basis or 50:50 basis. Hence, the term ‘balanced’.
  • Islamic/Syariah Funds are various funds which comply with Syariah principles and are normally approved by an appointed Syariah Board. These funds do not invest in companies which are involved in usury (riba’ like banks) and in businesses which are ‘non-halal’, like breweries, or gambling.
  • Equity Funds are basically funds which invest in stocks which are listed, either locally or offshore. A subset of equity funds is thematic funds. These invest in stocks of specific niche sectors, for example, in the China Market, the luxury sector or alternative energy sector.
  • Capital Guaranteed/ Principal Protected Funds are funds where the principal amount invested is protected if held to maturity period (for example, 3 or 5 years). Sometimes the fund may have a guarantee (provided by a reputable bank) on the principal; this may enhance the attractiveness. But note that the returns for these funds are not guaranteed.

Monday, October 13, 2008


Learn how to benefit from the volatility of the stock market

What is Ringgit Cost Averaging?

Ringgit Cost Averaging (RCA) is an investment technique intended to reduce exposure to risk associated with making a single large purchase by investing a fixed amount on a particular investment (such as unit trust) at regular intervals (either monthly or quarterly), regardless of the unit price.

For example, you can choose to transfer RM100 to RM200 from your salary to a unit trust fund or you can even make a RM500 or RM1, 000 investment every quarter. The amount and frequency of your investments depend on your financial means and future goals.

How Ringgit Cost Averaging Works?

More units are purchased when prices are low, and fewer units are bought when prices are high. The premise of ringgit cost averaging is that the investor wants to safeguard against the market losing value shortly after making his or her investment.

Although ringgit cost averaging can be an effective way of investing, it does not assure a profit or protect a loss in a declining market. Furthermore, you must continue to purchase units both in market uptrend and downtrends in order for the strategy to be effective. Hence, you should choose an amount that you feel comfortable investing under all market conditions.

To illustrate ringgit cost averaging better, let’s say you want to save RM12, 000 each year for your child’s education fund. Instead of investing it in a lump sum and bear the risk of entering when the market is high, you decided to invest RM1, 000 into a unit trust fund each month as shown in the chart:

In this example, the average unit price over the period was RM0.1983 but the average cost to you was RM0.1923, resulting in a 3% lower price to the average unit price over the period.

Paul Clitheroe,
“Ten Key Steps to Wealth”, 2002.

Does long-term investing work when bourse swings wildly?

Does long-term investing work when bourse swings wildly?
By Noripah Kamso

FUND managers, me included, are forever telling investors to expect returns over the long-term. Results may vary from year to year, but over the long-term you may expect about nine per cent to 12 per cent potential returns annually.
We like to say things like: “In a bad year, the downside can be 10 per cent or more” and “In a good year the upside could be as high as 15 per cent or more”.

We also caution that risk and reward are inextricably intertwined, hence one should not expect to reap high returns without undergoing high risk and volatility.

However, we usually conclude, over the long-term it makes sense to invest in equities.

Now all that advice sounds good in theory but it’s hard to believe in it in reality when the market soars 26 per cent one year, then plunges 15 per cent another year, before swinging back up again. An investor wouldn’t be blamed for thinking, “This is madness! I don’t have the appetite for all these wild swings. What are those fund managers talking about?”

I hope, in this article, to shed some light on the issue and show that there is a method to the madness after all. Let’s look at how the stock market has performed since it started in 1976, as measured by the Kuala Lumpur Composite Index (KLCI):

Interesting points to note from this data are (See chart):

# In its 31 years of existence, the KLCI has hit the magic nine per cent to 12 per cent return range exactly once

# In seven of those years, the KLCI lost more than 10 per cent

# In 14 of those years, the KLCI gained more than 15 per cent

# Therefore, in 21 out of its 31 years of existence, the KLCI has either really disappointed investors or made them extremely happy Going by this performance, it would seem as if fund managers don’t know what they’re talking about, because the stock market has either performed outstandingly well or very poorly.

It is true that in the majority of its years, the KLCI has been pretty volatile. That’s why we advise investing over the long term, to ride out the volatility that will happen from year to year.
If investors were to analyse the numbers from 1977 until 2007, they would be surprised to learn that the KLCI enjoyed annualised returns of 9.15 per cent per annum.

Well how about that? This figure lies within the magic range of nine per cent to 12 per cent annual returns. Analysis also shows that the KLCI has registered an average yearly return of 13.33 per cent since its inception.

It is very important that investors expect returns to fluctuate widely from year-toyear, and they should probably even welcome this volatility. It is the market’s erratic journey over the long term that enables investors to get the nine per cent to 12 per cent annualised returns range. This is why a fund manager can sound like a broken record sometimes because the ending of the story doesn’t change. The important thing to realise is this: in order to get to the end of the story one must begin it, by investing.

So, when is the best time to invest? In my view, it is in the investor’s best interest to invest as much and as close to the beginning of the year as possible. In fact, I would take that year-end bonus and just invest it straight away. And I’m not saying this just because I’m in the business of managing people’s funds.

The reason is very simple and clear: in 21 out of the last 31 years, the KLCI registered a positive return. Therefore funds invested at the beginning of every year would have yielded positive returns two out of every three years, or 67 per cent of the time.

Alternatively, investors should invest regularly whenever they can, either using the ringgit-cost averaging or value averaging methods, which I will explain in detail in a later article.

In conclusion, long term investing works because it rides out stock market volatilities to give the potential returns in the nine per cent to 12 per cent range. Investors should start investing to not miss out on these potentially attractive returns.

Datuk Noripah Kamso is the chief executive of CIMB-Principal Asset Management Bhd.

Source : http://www.btimes.com.my/Monday/OurPick/20081006010114/Article

Thursday, October 2, 2008

Fahami Dana Ekuiti

DANA ekuiti ialah jenis dana amanah yang menjurus kepada pelaburan dalam pasaran modal, khasnya ‘saham’ dan mengutamakan peluang kenaikan modal kepada pemegang unit. Pelaburan saham ini merujuk kepada pembelian pegangan dalam syarikat-syarikat perniagaan bagi mendapatkan sebahagian dari pendapatan dan aset syarikat-syarikat tersebut.

Pengurus-pengurus dana memegang portfolio pelaburan pelbagai jenis saham, membolehkan amalan peruntukan aset (‘diversification’) dilakukan, dimana risiko-risiko pelaburan boleh cuba dikurangkan dengan cara meluaskan tebaran risiko meliputi serangkaian luas pelaburan aset dan corak pelaburan.

Amalan ini bertujuan mengimbangi kesan kuasa dan ketidaktentuan pasaran ke paras risiko munasabah yang boleh diterima oleh pelabur. Harga-harga saham di pasaran boleh naik dan turun, begitu juga harga-harga unit dana.

Jadi pulangan kepada pelabur dana ekuiti adalah kenaikan modal iaitu apabila harga unit meningkat berbanding harga yang beli. Selain itu, apabila sesebuah syarikat mengumumkan meraih keuntungan, sebahagian dari pendapatan itu diagihkan kepada pemegang saham dalam bentuk dividen. Pengurus dana kemudiannya mengagihkan dividen itu kepada pelabur unit amanahnya mengikut formula dan jumlah unit yang dipegang.

Terdapat pelbagai jenis dana ekuiti, bergantung kepada objektif pelaburan dana itu sendiri. Maklumat tentang objektif pelaburan sesuatu dana boleh disemak dalam prospektus, atau dengan bertanya terus kepada syarikat pengurus dana anda, atau melalui agen jualannya. Objektif dana penting difahami kerana ia menerangkan matlamat sesuatu dana diwujudkan, tentang apa yang ingin dicapai dan dilakukan oleh pengurus dana ke atas wang pelaburan anda.

Ada dana yang mempunyai fokus pelaburan dalam sahamsaham mewah (‘blue-chip’) iaitu saham syarikat-syarikat yang besar, yang mempunyai rekod keuntungan dan dividen yang kukuh, ada yang berorientasikan saham-saham sektor khas, dan ada yang menumpukan kepada saham syarikat-syarikat kecil (small cap’) yang mempunyai potensi pertumbuhan. Perkataan ‘pertumbuhan’ atau ‘growth’ adalah satu perkataan popular dalam industri, kebiasaannya digunakan oleh dana-dana yang menjurus dalam pelaburan ekuiti.

Pertumbuhan di sini merujuk kepada hasrat dana untuk mewujudkan peluang kenaikan harga yang besar ke atas harga-harga unit. Namun adalah lumrah pelaburan bahawa hasrat pulangan yang tinggi adalah seiringan dengan tahap risiko tinggi yang perlu dihadapi. Portfolio saham-saham dalam dana pertumbuhan boleh naik dan turun, menyebabkan unit-unit amanah turut mengalami perubahan harga yang ketara dalam jangka panjang.

Instrumen Pelaburan Dana Ekuiti Islam
Pengurus dana ekuiti Islam melabur dalam pelbagai sekuriti patuh Syariah kebiasaannnya meliputi saham biasa, waran dan hak langganan boleh pindah (TSR). Waran dan TSR diklasifikasikan sebagai sekuriti patuh Syariah dengan syarat, saham pendasar kedua-duanya merupakan sekuriti patuh Syariah. Manakala saham atau stok pinjaman (ICULS) dan bon hanya boleh dilabur apabila terbitannya berpandukan prinsip Syariah.