We Had Moved To www.novabankinghall.com/en

Thank you for your continuing support our blog, novabankinghall.blogspot.com. In order to continue sharing and discussing financial products, we had decided to moved to a new website : www.novabankinghall.com/en . There will be function for forum, download and in future will have more database research, polling, or even product review submitted by our readers. Thus in future please refer your friend to our new website instead of this blogspot. Thank you very much.

My latest article is "Secret To Customize Your Own Capital Protected Portfolio", please view it at www.novabankinghall.com/en. Thank you again.

When Can You Accumulate Your First Million?

I am glad that more and more of my friends are getting more financial savvy now. Last week I met a friend whom told me he wants to have a huge amount of money (eg RM500K) and retire for good. Some times we just want a simple life. Imagine if you have RM500K and invest into a very safe investment which gives you 10% return per annum, only from your return from investment you will have about RM4K to spend every month. By that time, working is just a hobby. :) Therefore I am writing this article to show how can you make it. But this time lets make it tougher, we target to make RM1million.

'

Are you ready for the discussion? Let see how shall we starts... There are many assumption and status-quo factors which MUST be included. I'll explain bit by bit

Annual Income
I start with a average annual income of RM36k annually. This will include your basic, allowance and bonus for the whole year. Your salary increment will be as follows:-

First 5 years = 7% growth in your annual income
Next 5 years = 5% growth in your annual income
Next 5 years = 3% growth in your annual income
There after no increment ( just to be more conservative in my analysis )

Initial Investment
My research will starts with someone with a RM10K to start as his investment. This money is not necessary in cash form, it can be your assets in stock market or even your fixed deposit, unit trusts, investment link etc. But this money must be a liquid asset which can be reallocate according to the investment strategy as below.

Investment Strategy
We will put all the investment money into equity fund (50%) and bond fund (50%) with the assumption that equity fund will be able to garner 15%pa return in the long run while 7%pa for bond fund. Opss another very important assumption in this analysis is that you are not the Warren Buffer of Malaysia. Anyway as long as you can make an average return of at least 10% return pa in the long run shall still fits into this analysis.

FYI for the past 5 years, the average return for all the equity funds in Malaysia is 20%. But to be more conservative, I only use 15% as the expected return in this analysis. Anyway for bond fund shall be quite save to say 7% pa because most bond fund can make 5% to 8% return pa.

EPF Investment
I assume that your employer contribute 12% into your EPF account and yourself 11%, therefore total will be 23% of your income into your EPF account and expected return is 5.5% pa. Again, I assume that this money is purely for retirement purposely, thus we won't take out this money to other purpose such as purchase house/ further studies/ medical expenses.

Savings

I assume that you are able to save 30% of your annual income net after EPF deduction. But I didn't include the consideration for tax expenses. Its quite difficult to include tax expenses because everyone might have different tax rebates etc. Therefore pardon me that this analysis do not include tax expenses which can range from 3% to 28% of your total income taxable.

The savings each year will be included into your investment fund at the end of each year ( add into "beginning invst").

Total Asset
Therefore your total asset shall be the ending invst amount plus the EPF savings.

Conclusion

Based on all the assumption above, you will be able to accumulate your first million in the next 18 years. My friend whom asked me shall be 45 years old by then.... Opppsss... I hope he doesn't mind his age is disclosed. If you have 1 million, what would you do? :) Too early to dream? Not really, just properly plan your strategy now... based on my analysis, you will be a millionaire soon. Please remember me when you are a millionaire... I might need some funding from you :)

So if you have RM1million, if you just take out the return of 10% pa, you will be able to answer a annual income of around RM8k per month. Wahhhh happy? Well focus on how to build your wealth, not to think when is the next recession. Focus in recession will cause your wallet to go recession too. Have properly financial planning and understanding about the investment instruments.

P/S: Based on the same assumption above but just different target saving, your 1million will be on:-

10% saving, will be able to accumulate RM1 Million in the next 22 years
20% saving, will be able to accumulate RM1 Million in the next 20 years

30% saving, will be able to accumulate RM1 Million in the next 18 years

40% saving, will be able to accumulate RM1 Million in the next 16 years
50% saving, will be able to accumulate RM1 Million in the next 15 years

Finally if you are extremely keen on the calculation table, please email me. I'll send the table in excel format to you. So that you can play around using your own assumptions. Well you might want to start your initial investment with RM100k or your annual salary of RM50k, who knows?

What Is Hedge Fund?

ahooWhat is hedge fund? Fund that can be used for hedging? No no no my dear. Basically hedge fund is very close to being a mutual fund (aka unit trust). The main different is that hedge fund is not regulated by the local investment regulatory authorities. In our case is the Securities Comissions (SC).

Investment Mandate

Since it's not regulated also means that hedge fund has more flexible investment mandate. For example a unit trust in Malaysia can't hold more than 15% of its portfolio on a single stock while hedge fund does not has this regulation. In another word, a hedge fund can invest all into just a few stocks. On an extreme example is less than 5 stocks.

`

Leveraging (Borrowing)

Hedge fund can borrow to invest. Don't be suprise to find hedge funds that borrow up to 1000% of its initial capital to invest. Alternatively hedge fund also can invest into derevative only which eventually leverage its position without owning the underlying asset.

Profit Sharing

Most hedge funds practice profit sharing as part of their management fees. For example a hedge fund can set a minimum benchmark of 5%. Any return of the fund above the threshold of 5% will be split at 80:20 (invester:manager) with the hedge fund manager.

Example:-

Benchmark (Threshold) = 5%

Fund performance = 30%

Profit sharing (investor:manager) = 80:20

Thus the performance bonus for the manager is 20% of 25% (30%-5%) which is 5%.

There are very important point to take note:-

1) there is no loss sharing with the manager

2) normally there is a minimum or fixed management fees (eg 1% per annum of the asset under management) despite the performance of the fund

`

Fund Manager Commitment

Due to the profit sharing feature, some fund manager might tend to take higher than normal risk because he will be awarded for the extra gain but won't be penalise for the lose. Therefore some company actualy enquire the manager themself to invest into their own fund (certain % of the fund's net asset value) so that the fund manager will be more cautious to manage its own money which is part of the fund itself.

Valuation and Liquidation

Most hedge fund do not practice daily valuation. They are either priced twice monthly, once monthly or even quarter yearly (rare case). This is due to the reason that some of the instruments that the fund invest into might not be liquid enough to be valued daily. Logically if there is not liquidity (no transaction) on the instrument, its difficult to get the most accurate price on the daily basis.

Liquidation (or redemption) on the fund is also done according to its valuation frequency, among the other reasons to do that is due to the ease in managing its cash flow. A fund which has a stable NAV (less unit creation or unit redemption) is easier to manage because you can plan when to realise your profit or gain.

Fund of Hedge Funds

This is a mutual fund which invest it's asset into many other hedge funds. Due to the nature of hedge funds which are unregulated, thus naturally imposed a higher risk to the investors. Therefore to reduce risk, a mutual fund is created to invest into a few other hedge funds and their performances are monitored by a mutual fund (regulated) manager. Not all countries allow Fund of Hedge Funds ( a type of FOF - Fund of Funds ).

Hedge Funds in Malaysia

Basically there is no pure hedge fund to date in Malaysia. Due to its high risk level and the complicated instruments used by hedge funds. Infact in Singapore, hedge fund is a niche product but globally hedge funds activities have grown substantially. But the feature of hedge fund can appear in many different form of mutual funds such as fund of fund, capital protected fund or structured products.

Risk Level of Hedge Funds

Hedge fund do not necessary means higher risk, but due to it's unregulated nature, investors tend to be more keen on the higher risk (focused portfolio and leveraging) hedge funds. As pre-mentioned, there are capital guaranteed hedge funds.

Bursa Malaysia Trading Halted

Malaysian stocks fell the most in a decade after the ruling coalition's worst election result in fifty years put Prime Minister Abdullah AHmah Badawi's position in doubt and raised questions about his spending program.

Trading on the Kuala Lumpur stock exchange was halted for an hour after the Kuala Lumpur Composite Index tumbled by the 10 percent limit as opposition parties took control of almost half the states contested in March 8 elections. This is an automatic protection mechanism to protect the investors so that market might oversold or unreasonable selling due to panic in the market. Thus a down of 10% will automatic suspend the market and halt all trading activities. The market is close about 2:58pm Malaysia time. Till now Malaysia is the biggest drop market in Asia Pacific.

Most goverment linked company (GLC) stock prices are badly hit due the the uncertainties in their projects due to the change in the goverment especially the few main states such as Selangor, Penang and Perak. Foreign investors has been selling down the market since month ago and have been selling furiously today.

I Have The Cash, Should I Pay Off My PTPTN Immediately? Should I Even Take The Offer At The First Place?

I had come across friends, whom refuse to accept the PTPTN loan or some whom actually borrow from their parents to settle off all the PTPTN loan as soon as after their graduation.


Some doesn't even pay which I had read in newspaper about some local self made millionaires in Malaysia whom hasn't pay off their PTPTN. Please do not do that.

Anyway a few simple issue that I wish to share with you are below:-

1) Why you should accept the PTPTN offer

PTPTN is consider the cheapest source of financing that you can get. Refer the table below. There is none financing products that offers you a loan at 4%. More over getting a PTPTN loan is only once (or max twice) in your life time. Not the same case with credit card which you can apply every now and then. The processing procedure is very easy, which will be solved in the university during the orientation week ( depending on university procedures ).

2)Why you should not use your parents' money to settle off the loan

Your parents' money are meant for retirement, thus one should be responsible for his/her loan. Settling off the loan in lump sum doesn't provide you the liquidity option. Imagine if you need the money for emergency case (eg medical expenses), you can't withdraw that amount of money back from PTPTN.

Imagine if you can borrow at 4% and invest at a guaranteed return of 5% (eg Merdeka Bond), you would have been able to make a riskless investment return of RM200. Lets do some mathematics, the net return is 1% (5%-4%) while investing RM20,000 (PTPTN loan amount) at the net return of 1% gives you RM200 return per annum.

As long as the expected return is higher than the borrowing cost, you will definately make profit along the years servicing your education loan. If the expected return is 8% (eg ASW 2020), you would have been able to make a riskless investment return of RM800. Lets do some mathematic again; investing RM20,000 (PTPTN loan amount) at the net return of 4% (8%-4%) gives you RM800 return per annum.