When it comes to investing, there’s a lot of options to choose from. But with time being of the essence, what are the options that are available, and what would they cost?
I’m going to list down a few investment products that are available to everyone. These are what are called retail investment products. They include:
- Fixed deposits
- Mutual funds/unit trusts
- Exchanged traded funds (ETFs)
Let’s dive into each one, to find out what they are, what costs you should be aware of and who they are most suitable for.
Many would argue if fixed deposits are even investment vehicles at all. After all fixed deposits are like an upgraded version of your normal savings or current account deposits.
Well, not quite. Investing is all about taking a little bit of risk, to earn some returns on capital that you put in. As far as investing goes, fixed deposits are pretty low risk. You agree to lock your money in for a pre-determined amount of time for a supercharged return, relative to keeping money in a savings account. The risk with fixed deposits is that if you uplift early, you could stand to earn nothing, whilst having your money stash lose value due to inflation.
To put things into perspective, the average savings account pays about 0.25% per annum, to 2% per annum (hello Bank of Nova Scotia!). To get higher rates on your savings, most banks will need you to keep a minimum of RM50 thousand. So, yeah.
For fixed deposits, for a minimum of RM1 thousand , you can look to get a return of upwards of 3%. That’s 1,200% more than what you’ll from your basic savings.
Compared to other types of investments though, the fixed deposit is as basic as basic gets. There are barely any charges when placing the deposit down (except admin charges for printed statements). The catch is, for many banks, when you uplift your deposit before its maturity, you risk not earning anything at all.
Fixed deposits are suitable for people who are more risk averse. You lock in your money for a short period of time, for a specified return. There’s little risk of capital loss, but the downside is that you forgo potentially higher return. If you’ve built up a rainy day fund, fixed deposits are the perfect place to put them, until the time that you need them.
Mutual funds/ Unit trust funds
Imagine a group of people, pooling funds, handing it to someone, who takes the money and invests it on behalf of that group of people. That, in essence, is what a mutual, or unit trust fund is. The manager, like CIMB Principal, Public Mutual and the like, collect money from investors, and invests it according to the fund’s goals (also called a mandate). Unit trust funds are often actively managed by professional funds managers, supported by a team of research analysts, with the aim of beating a specific benchmark. In short, they’ll do all the work of making your money grow for you…for a fee.
Mutual funds are great, in the sense that there are so many of them, designed for different kinds of investors. There are many flavours to mutual funds, such as ones that invest specifically in equity, fixed income, commodities, or a mix of everything. Some funds also offer exposure to foreign markets, in the same kind of asset class mentioned earlier.
Many funds require an initial and subsequent investment of RM100. This makes it pretty affordable for a lot of people, and it provides a form of diversification. This is because as everyone pools their money together, the fund manager can put a little bit of money into a lot of different assets. Take for example, investing in the stock market. If you wanted to, you could invest RM100 into the stock market, but you’d most likely be able to buy a couple of shares in one company. Not awesome in terms of diversification.
There are some charges that you need to be aware of when it comes to mutual funds. These are namely:
- Sales charge
- Annual management fee
The sales charge is the initial fee you pay when making your investment. It can range from as low as 0%, to over 5%. It’s used to cover the commission and promotion of the fund by their unit trust agents. The annual management fee on the other hand, takes a percentage amount out of the amount invested, to pay for the fund’s administration costs (like salary and all). This can go up to 2% per year. Though they don’t charge you directly, it does bring down the performance of your fund a little.
Mutual funds are suitable for people who are looking to invest for a horizon of over 3 years. The charges that are taken out of the fund do eat up quite a bit of your returns, and you’re not likely to break even within a short time. Since there are different kinds of funds for people with different risk profiles, you really just have to figure out what kind of investor you are, and take your pick. Fundsupermart is a great place to start.
Much commonly known as ‘stocks’, equity simply means ownership. When you buy and sell equity, you really are just trading ownership in a company. People do this for two reasons. One, is for the possibility of the value of the company stock going up, and two, for dividends.
In Malaysia, you can buy and sell publicly listed companies on Bursa Malaysia. Shares on the market are traded in board lots. Each board lot is equal to 100 company shares. For example, say that one Maybank share is priced at RM9.82. If you wanted to buy 1 board lot of maybank, the total value (excluding costs) of your purchase would be RM982 (which is 100 shares multiplied by its price per share of RM9.82).
To trade, all you need to do is open up a trading account, and a CDS account. A trading account is the account you’ll be doing your buying and selling, whereas a CDS – which stands for Central Depositary System – is where the shares that you buy and sell will be recorded. There are many different brokers available, that offer competitive rates for you to trade your stocks. All of them will offer trading on the local bourse, and some even offer access to foreign markets!
The main charges that you need to be aware of when trading equities are:
- Commission charges
- Clearing fees
- Stamp duty
Commission charges are what you pay to your broker. Consider it as a service charge, for allowing you to use their platform to trade shares. Charges can range from 0.05% to 0.8% of total traded value. Some brokers, like Rakuten, simply charge a flat fee for trades up to a certain amount (they’re also fully online!).
Stamp duties are levied on your buy or sell contract with your broker, and is charged at RM1 for every RM1000 of your transaction value. It’s capped at a maximum of RM200. Finally, clearing fees are charged at 0.03% of your transaction value, capped at RM1,000.
Let’s put that into practice. Going back to our example earlier, you bought 1 board lot of Maybank shares, your transaction value is RM982.
Your broker charges 0.42% commission rate (with a minimum of RM8) on your trades. Multiply that by your transaction value, and the commission payable is RM4.12. Since you’ve not met the RM8 minumum, they’ll charge you a flat RM8 instead. Effectively, this is a commission rate of about 0.81%.
Next, is the stamp duty, the total amount to pay for this transaction is RM0.98 (RM982 multiplied by 0.001). And lastly, is the clearing fee, which comes up to RM0.29.
All in all, the total cost for your transaction to buy 100 Maybank shares in this example, is RM9.27.
Equity trading is a little bit more difficult, I feel, compared to picking out a unit trust fund or an ETF (which I’ll get to next). Ideally, when buying a stock, you’d want to know what that company does, so a little bit of research is required. If you’re going in blind, or based on tips from your friends, or brokers, you’re pretty much putting things up to chance. You could get lucky and make good returns (some times really good returns), but there’s also a chance that things could go wrong, really quickly.
Unless you have a lot of capital to invest, the stock market doesn’t do much when it comes to diversification. So if you get a bit nervous about lots of fluctuations, and putting all your eggs in one basket, maybe save equity trading for later.
Exchange traded funds (ETFs) can be thought of unit trust funds, but traded on the stock exchange. Like mutual funds, there are many flavours of ETFs. You can buy ETFs that offers you exposure to equity, fixed income, commodities, currency, or a mix of pretty much everything. You name it, they probably got it.
Unlike mutual funds though, ETFs are passively managed. This means that the issuers of ETFs don’t actively trade their holdings. Rather, they build a portfolio of assets that mirror a benchmark, like the KLCI for instance. The movement of ETF’s price will follow the benchmark that it’s tracking. Every time the benchmark index it follows rebalances the assets it’s holding, the ETF will follow suit.
Compared to buying stocks, ETFs offer you a great deal of diversification. If you had RM1000 to spend, you could buy 1 board lot of Maybank stocks, or about 5 board lots of the FBMKLCI ETF. What’s great is that by buying the ETF, you’d technically be buying into the 30 stocks that make up the FBMKLCI (Malaysia’s benchmark index), as opposed to owning just one index stock. After all, you could have analysed that the market is going up, but end up buying the wrong stock. Buying an ETF helps you spread that risk.
What’s great is that the cost of buying an ETF is the same as buying stocks on the market. ETF’s do charge annual management fee, but for something as low as 0.5% per year, you’ll barely notice it. In Malaysia, you’d be able to buy 10 ETFs that are listed locally. If your broker offers gateways to foreign markets, you’ll have the option of picking a boatload of ETFs, but beware of foreign currency fluctuations.
ETF’s are suitable for people who want to invest in a diversified portfolio, and are maybe too time-constrained to research individual stocks, or commodities. Rather than buying individual stocks, or any asset type, save yourself the time by investing in a fund that tracks the benchmark of your choice. You can also save yourself from being right on the market, but chose the wrong stock.
And that’s it! These are some of the investing options that are available to you. There are of course a few more investment vehicles that you can look into, like currency trading, or bank structured products. But I feel as if these require a bit more of your time (currency trading runs pretty much round the clock, and requires a lot of monitoring) and a lot more capital (bank structured products often need a minimum of RM50 thousand in capital).
So if you’re looking to start investing some of your excess money, look into these options first!
Do you have any other investment types you think we should look into? Let us know in the comments below!
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