28 December 2011

Maybank's Fortune8 Investment-linked Insurance Product

Came across an advertisement recently on Maybank Group's latest capital guaranteed investment-linked insurance product, the Fortune8. Considering the volatility in the share market now and low fixed deposit rates, I took a closer look at this product to see if it is going to be worthwhile investment.
In a nutshell, it is a 42-month single premium investment-linked product with the following characteristics:
  • Guaranteed 5% cash payout at the end of the 18th month
  • Capital guaranteed at maturity (end of 3.5 years)
  • Death benefit in the form of lump sum payment of 125% (for entry age of 18-55) and 105% (for entry age of 56-70) of the upfront premium paid
  • Potential upside from commodity investment which will be paid at the end of the policy
Let's breakdown the above one by one.
Firstly, there is a guaranteed interest payment of 5% at the end of 18 months. Straight forward - you get cash equivalent to 5% of whatever you paid as premium upfront. Note that the investment principal is known as "premium" because this is supposed to be an insurance product.
Secondly, your capital, in this case, the upfront premium/investment principal, is guaranteed as long as you hold this investment until maturity. Hefty surrender charge will be applied if you opt to withdraw early.
Thirdly, the death benefit that makes this product an "insurance". Note that this feature is unfavourable for retirees since the death benefit is significantly lower.
Lastly, the "investment-linked" component and this is where the catch is. Based on the e-brochure downloaded from Maybank's website, the bank has projected three scenarios and their respective expected returns. The peculiar thing is that the e-brochure states that they are interest rate scenarios while the investment is options on commodity-linked index. Perhaps Maybank has taken a view that commodity prices and interest rate moves in perfect correlation? Strange assumption though. Anyway, the expected returns under the three scenarios are:
(a) Bullish: Returns of up to RM130,162
(b) Flat: Returns of up to RM514
(c) Bearish: Zero return.
But what do these numbers mean? I have worked out what is your per annum return based on the 5% payout after 18 months and the above expected returns. This is what I call the all-in rate*, which you can compare against the per annum return of other products, such as fixed deposits:
(a) Bullish: 7.86% p.a.
(b) Flat: 1.58% p.a.
(c) Bearish: 1.44% p.a.
Also, note that the returns on the investment-linked part will only be paid at maturity.
Is this a good investment? Here's my personal opinion. To begin with, I will only invest in this product if I am taking a view that commodity prices will go up over the next 3.5 years. So, if my bet goes wrong, I still get 1.44% p.a., which is not bad. But what puts me off is that in the "flat" scenario, I am better off leaving my money in fixed deposit, which pays about 3% p.a. versus 1.58% p.a. projected for this product under this scenario.
Having said that, I am not convinced commodity prices will continue its uptrend for the next 42 months. The next 12 to 24 months maybe, but 42 months?
Comments are welcomed.
* For the more finance-inclined readers, the "all-in rate" is the IRR of the investment over the investment period of 42 months.

24 September 2010

iPhone 4 in Malaysia: Maxis or DiGi?

There has been some hype about iPhone 4 since Maxis announced its launch recently. Not to lose out, DiGi announced its packages claiming to give users more.
So, which is better? At a glance, DiGi's RM58 per month package outrightly beats Maxis's RM100 per month package. However, before we jump into any conclusion, we should look into the finer details of each package.
Here, we will compare the cheapest packages from both telco and assume a 24 month contract.




Phone price 2,090.00 1,390.00 700.00
Monthly package 58.00 100.00 -42.00
x 24 months 1,461.60 2,520.00 -1,058.40
Total (phone + package) 3,551.60 3,910.00 -358.40
Divide by 24 months,
so every month you pay: 147.98 162.92 -14.93
While DiGi's monthly fees are much cheaper at RM58 vis-a-vis Maxis's at RM100, the overall net effect is that you only pay RM14.93 more if you use Maxis. This is mainly because the phone subsidy Maxis offers is far higher than DiGi. However, there are still other points to consider:
  • With Maxis, you pay RM14.93 more. However, in the call package, DiGi only offers 200 minutes, while Maxis offers 333 minutes. The extra 133 minutes will cost you RM19.95 (133 mins x 15 sen).
  • Maxis's free 200 SMS is to Maxis number only.
  • DiGi does not charge for data usage above 1Gb.
  • DiGi requires 24 months of prepayment; Maxis requires 4 months only.

So what does all these mean to you? Too many factors to compare? Well, here are some point to help you decide:

  • If you are a heavy user in terms of calls, Maxis might be cheaper. Check your existing phone bill, if your total domestic call charges are more than RM30, then you are calling more than the free 200 minutes offered by DiGi. If your call charges are about RM45, there is no difference between the two. But if your call charges are more than RM45, Maxis is probably cheaper for you.
  • If you sms mostly to non-Maxis number, DiGi might be more suitable. If you sms mostly to Maxis numbers then there's no difference. But if you are a hardcore SMSer (you know what I mean), Maxis offers you additional 500 SMS at RM8 per month (but to Maxis numbers only).
  • If you expect your data usage to exceed 1Gb per month, then DiGi is cheaper. However, users of Maxis under the iPhone 3Gs package are given only 500Mb data and feedback is that it is more than sufficient.
  • If your credit card limit is small, DiGi will reduce your limit significantly because it charges the whole 24 months of monthly fees upfront. Maxis only charges RM400 upfront.
Weigh each factor carefully and make the right choice! Having said all these, the number 1 criteria should be the reception quality at your workplace and home. No point in getting it cheaper only to find that you can't use it! In conclusion, be penny wise, pound wiser!

27 June 2009

Time to refinance your home loan!

With the recent drop in interest rates, including the base lending rate (BLR), most home loans in the market has fallen drastically. At the same time, the home loan market has become increasingly competitive. Banks are trying to outdo each other in offering lower and lower rates for their home loans. At last check, some banks are offering up to BLR-2.3% with flexible repayment and daily interest rest.

If you have a home loan charging you a fixed interest rate or BLR plus margin (instead of BLR minus), then it may be worthwhile to consider refinancing. In most cases I have seen, even with additional costs involved when refinancing, it is still worthwhile to do it.

However, you need to be fully aware of various other factors besides interest rates when considering the refinancing of your existing home loan. Here are some of the factors.

Firstly, any additional legal costs involved. While most banks offer zero-moving costs refinancing, it usually comes with a higher interest rate for your loan. Evaluate if it is better to take a higher loan amount to pay for the legal costs, pay for it from your pocket or pay higher interest rate by taking the zero-moving costs loan.

Secondly, check for early settlement penalty both on your existing loan and the new loan. This is basically the penalty the bank will charge you for settling your loan before the maturity date. Normally, the banks will have a certain "lock-in" period; beyond that, there will be no penalty. Check the offer letter from the bank and look out for the lock-in period. Not only is the lock-in period important for the existing loan, but equally important on the new loan. If you have plans to sell your house in the not-too-distant-future, you should consider loan offers which have the shortest lock-in period.

Thirdly, any additional costs associated with your mortgage reducing term assurance (MRTA). If you are lucky, your insurer will allow you to transfer your MRTA to the new loan, subject to certain conditions but don't count on this. The most common scenario is you will get a slight refund on your existing MRTA; but you will need to buy a new MRTA. Surely you are now older than you were since taking on the first loan, so the premium for your MRTA will also increase with your age.

Fourthly, does the new loan allow flexible repayment with daily rest interest calculation? This means you are allowed to make any amount of extra repayment without having to first give notice to the bank and/or incur a penalty. Daily rest interest calculation means any extra repayment made will be deducted from your outstanding principal immediately and the interest is computed based on the reduced outstanding principal from the day the extra payment is made (on the other hand, monthly rest means whatever payment made will only take effect at the end of the month).

Another point to note is that if the loan allows you to make any additional payment without penalty, then the tenure will not make any difference on the overall financing costs. In this case, I would advise you to extend the loan as long as possible but pay the instalment amount as if the loan is of shorter tenure. This will give you more flexibility in case you wish to take on more loans to buy a second home or second car in the future. For example, if for the same loan amount and interest rate, a 20-year loan has an instalment of RM1,300 while a 30-year loan has an instalment of RM1,000, take the 30-year loan but pay RM1,300 every month (try this out in the spreadsheet below).

I have created a spreadsheet to help you decide if refinancing your home loan will help you save in the overall financing of your home. The spreadsheet takes into consideration all additional costs involved and look at the overall financing rate for your home over the whole financing period, i.e., from the start of your existing loan to the end of the refinancing loan. You can also make assumptions about additional payments at any point in time (but the spreadsheet assumes monthly rest interest calculation) and see how it affects your overall financing costs.

Click here to download.

Good luck!

06 April 2009

Bonus for 2008 or 2009?

Just an update on my previous post. Besides the additional tax relief you get if you are receiving various benefits from your employer such as transport, mobile phone, etc., there is another change that may interest you.

For those of us who receive last year's performance bonus this year, there is a slight difference in the treatment from assessment year 2009 onwards (affect your tax returns next year, not this time round). In your BE Form, you will see this section called "Pendapatan Tahun Kebelakangan Yang Belum Dilaporkan". For this year, we will put in our performance bonus for 2007, which was only paid to us in early 2008. The Inland Revenue Board (IRB) will then take out your old file and recompute the tax payable for 2007.

For some reasons known only to the IRB, there is no column for PCB (Potongan Cukai Berjadual) under the "Pendapatan Tahun Kebelakangan Yang Belum Dilaporkan" section. So, IRB will only add your income to the previous year's tax computations, ignoring all tax deductions by your employer when your bonuses are paid. IRB will then send you an overstated Borang JA requesting that you pay up taxes which you had already pay.

So, every year, I am faced with the pain of having to write to IRB and explain that a huge chunk of my bonus had been deducted and repatriated to IRB under the PCB scheme.

For those of you who did not bother to dig out your old files and recompute the taxable amount to reconcile with the Borang JA, guess what? You have probably been paying double the tax every year!

Nevertheless, going forward you will not face this problem any more, at least we hope not! From assessment year 2009 onwards, all bonuses will be accounted for in the year it was paid, not in respect of which year it was paid for. To put it simply, your bonus for 2008, if paid in 2009, will not be part of your tax returns for 2008. To put it simpler still, it means as long as you receive the cash in 2009, it will taxed under assessment year 2009.

The implications? You will have a lower effective tax rate for 2008 as compared to other previous years because there will be no bonus impact (assuming, you are lucky enough to receive a bonus for 2008 and that bonus is paid in year 2009).

23 March 2009

Tax-ing time again!

It’s that time of the year again when we all scramble to meet the deadline for our annual income tax submission.

I’m sure everyone has heard about the “goodies” in store for us this year as announced under Budget 2008. For those of you who have started digging out your old phone bills and petrol receipts, planning to claim tax relief with them, stop and read on. If you think that’s silly, ask around. I’ve heard from quite a number of people that they are claiming tax relief for their mobile phone bills and expenses to travel to work!

The “goodies” are only for those of you who are entitled to the stated benefits under your employment. In the past, your employer will list down all these benefits on top of your gross salary in the EA Form, such as mobile phone benefits, car allowances, etc. If you are one of the lucky ones who receives such benefits from your employer, then you can exclude them in the declaration of your income. But chances are your employer would have already started excluding them in the EA Form for 2008.

Anyway, to help you complete your assessment form, here’s an electronic version of the form. Click here to download. Have fun!

16 January 2009

Unit trust: hold or exit

The Kuala Lumpur Composite Index has fallen by 39 per cent year-on-year in 2008. Bond markets did not fare much better. Going forward, things are not looking too rosy as well.

As a result of the general economic downturn, affecting both the equity and bond markets, 2008 is probably a year all unit trust managers would like to forget. As an example, here are the performance of some Malaysian balanced funds (a combination of equity and fixed income investment):

Source: http://www.signalinvest.com/personal/funds/price/

For those of you who invest in unit trusts, you may perhaps be wondering if you should exit your investment, i.e., sell your units. Some may even believe it may be a good idea to sell now and buy back later when the unit prices have gone down even lower. But what should you do?

Basics of Unit Trust
Before we go on further, let’s try to understand the basics of investing in unit trusts. We’ll start with an example. Let’s say you invested RM1,000 in a balanced fund unit trust in December 2006. The purchase price at that time was RM0.50 per unit, thus giving you a total investment of 2,000 units.

One year later, in December 2007, the fund paid out a distribution (or dividend income) of RM0.10 per unit. Based on your initial holdings of 2,000 units, you will be entitled to RM200 of distribution. However, at the time of investment, you have stated that you would like to reinvest any distribution income. If the price of the unit trust in December 2007 was, say, RM0.60, you would receive your distribution in the form of additional 333 units (RM200 distribution income/RM0.60 per unit). As such, your total investment as at December 2007 was 2,333 units.
In December 2008, in line with the market conditions, the funds did not fare that well. No distribution income was declared for that year and the price has fallen from RM0.60 to RM0.45. If you decide to sell your units, you will receive RM1,049.85 (2,333 units x RM0.45 per unit). In this scenario, you will still get a total return of RM49.85 over 2 years, which translates to about 5%. However, on an annualised basis, the return is only 2.46% p.a. Effectively, this means you are better off putting you money in a 12 month fixed deposit earning you about 3.5% p.a. (which will gives you a total savings of RM1,071.22 at the end of two years).

To sell or to hold
Back to the question on whether you should sell your unit trust now since the outlook for 2009 is not too great. There is no hard and fast rules about this but in general, I personally think it’s too late to sell now. The market has fallen drastically in 2008 and the unit trust prices are at their lows now. Depending on the price you have bought your units, you are likely to suffer losses or much lower annualised returns (perhaps even lower than FD rates as illustrated in the example above). In other words, the damage has been done, if you sell now, you are simply recognising the losses immediately.

Another factor to consider is what type of funds you have invested in. Typically, unit trusts are designed for medium to long-term investments. This means the investment is for at least 3 to 5 years. You can find these basic information about the fund’s investment objectives and benchmarks in the prospectus, annual report or website. The fund managers generally take a strategy to buy and sell for the funds they manage. Over time, the returns and losses may smoothen out to give the long-term investors some form of return close to its stated objectives and benchmarks. If you bail out too soon, you are simply absorbing the short-term losses.

Continuing from the above example, let’s assume if the price of the unit trust has recovered to RM0.55 in December 2009. Holding on to your investment (instead of selling them in December 2008) means your investment will be worth RM1,283.15 (2,333 units x RM0.55 per unit) by then. This will give you an annualised return of 8.67%!

What about adopting the strategy of selling now and buying in later when the price of the unit trust has fallen further? This idea of selling high and buying low later is only great if the prices are still consider “high” at this point. Both the equity and bond markets had suffered significant losses last year that the prices of your unit trusts are more likely than not at their lows now. Nobody knows where the market is heading. Some are talking about a rally in 2009, others expect the market to get worse. If the market does not get worse, you will end up in a situation of selling low now and buying high later.

In conclusion, my advice is to hold on to your investment for now. If it makes you feel better, check the annualised return of your investment if you sell now. If you feel comfortable with the return and you think you have given up hope on your unit trust, then sell. Otherwise, if the return is already bad, what can you lose by holding on for a couple of years more? Most unit trusts are for long term anyway.

01 December 2008

EPF Contributions: To reduce or not to reduce?

This has to be the hottest topic in town lately. The government recently announced that the monthly EPF deductions for employees will be cut from 11% to 8% for a period of 24 months from January 2009. Since then, there have been quite a number of controversies on this move.

Controversies aside, the key question on every Malaysian's mind is to retain the EPF deduction at 11% or accept the lower EPF contribution of 8%. Here, I will share my personal opinion on this issue.

Before we begin, we should look at how much savings an average Malaysian can expect in his/her EPF account at the time of retirement. To do that, we will be using these assumptions, which we assume should be typical for a graduate employee in Malaysia:
1. The EPF pays an average dividend of 5% per annum;
2. Monthly contribution is 11% by employee and 12% by employer;
3. Salary increment of 5% every year;
4. Start first job at age 23, with a starting monthly salary of RM2,000;
5. Retirement upon reaching the age of 55, thus giving us 32 years of EPF contributions;
6. No withdrawals of any form from EPF until retirement.

Based on the above assumptions, this typical graduate should retire with total savings of slightly over RM800,000 in his/her EPF account*. However, this is based on very strict assumptions as highlighted above. Changing any of the assumptions may have quite a significant impact on the final figure.

Just for illustration purposes, we add a further assumption that this employee receives a promotion every 5 years and the promotion comes with a 20% pay rise. This employee will then have a total of RM1.22 million in his/her EPF savings at retirement.

Now that we have an idea of how much we can expect from our EPF account on our retirement age, we can consider another factor of EPF savings – the dividend rate.

Over the past five years (since 2003), EPF has declared an average dividend rate of 5.04%, with the following rates:
2003: 4.50%
2004: 4.75%
2005: 5.00%
2006: 5.15%
2007: 5.80%

No doubt, EPF has not been doing a great job. It has almost consistently under-perform the KLCI. But in all fairness, it’s a tough job running a humongous fund like EPF. But it is not the intention of this post to discuss how well (or poor) EPF has done over the years. However, the point here is that EPF’s dividend rate has consistently been higher than the fixed deposit rates offered by Malaysian banks.

We can go on and on about how we can do better than EPF in managing our own investments and why FD rates are lousy benchmarks for funds like EPF. But the fact remains that the majority of average Malaysians know nuts about investing. If you were to reduce your EPF contribution and take the extra 3% to invest on your own, where would you put your money in?

For the more learned investors, I am sure you balance your portfolio to ensure that you have a certain proportions of high, medium and low-risk assets. Typically, the low-risk assets are in fixed deposits or cash-like investments. In this case, the 3%, if continued to be placed with EPF, can be considered as part of your low-risk assets. And this amount is likely to earn you more returns that any other low-risk assets you can find in town. (Of course, the only setback is that this low-risk asset is for very long term)

A factor to consider is the compounded amount of this 3% reduction in EPF contribution. In other words, we examine what is the total amount of reduction in your EPF savings if you reduce your monthly EPF contribution by 3% for two years. We used the same assumption that EPF pays a dividend of 5% per annum.

The results under various scenarios of current monthly salary is presented below:

Click to enlarge

For example, if you earn RM5,000 in year 2009 to 2010 (assuming no increment in between) and you opt to reduce your EPF deductions to 8% from 11%, you would have RM3,600 excess cash to spend over the two-year period. Effectively, this also means your EPF savings will be lesser by RM3,794 (including the compounded effect of a 5% p.a. dividend rate) at the end of two years. If you are retiring in 25 years’ time (i.e., you are 30 years old now), then your EPF account will have RM11,652 lesser in your account when you retire.

This is, of course, a very “back-of-the-envelope” method of calculation. Nevertheless, it gives you a rough idea of how much impact this 3% reduction would have on your retirement fund.

We have seen how much we can expect in our EPF account at our retirement age, consider EPF as a low-risk long-term savings instrument, and examine the impact of a 3% reduction in EPF contribution for two years.

In conclusion, if you are really finding it hard to make ends meet due to the high costs of living now, take the excess cash to help tide things over. Otherwise, consider if it is necessary to further reduce your retirement funds which is already insufficient to begin with. Even if you think you can do better than EPF in investment, consider this 3% as part of your low-risk asset mix. Another factor to consider is the tax implications (see post on 25 November 2008). In the end, the choice is yours^.

* For workings and to modify the spreadsheet to better estimate your own EPF savings at retirement age, drop me an email.

^ As the government motive is to put cash in your hands to generate more domestic spending, the 3% reduction is automatic. If you decide to retain the EPF deduction at 11%, you will need to submit an application to EPF. The form can be obtained in EPF's website.