Welcome to another blog post from the series: ‘Lets Talk Money’!
In the last article from this series, we ran through what does it mean to invest in a stock market and how it fares compared to just saving in a Fixed Deposit.
In this article, we’ll list the various ways that you can invest in the stock market (examples given are specific to Malaysia) :
1. Do-It-Yourself (DIY)
By investing directly in the local stock market through a Central Depository System (CDS) account. A CDS account is like your personal bank account, but for stocks.
You can open a CDS account with any Authorised Depository Agents such as banks (eg. Maybank, Public Bank) or stockbroking companies (eg. Mplus, Rakuten Trade). Different agents will offer different brokerage fee rates; typically RM8 or 0.1% whichever is higher, per transaction. Depending on the Depository Agent of choice, you may or may not have access to foreign stock market trading.
If you choose to DIY, the minimum purchase/sale of stock (in Malaysia) would be for 1 lot (ie. 100 units). What this means is if you want to buy a stock valued at $3 each, you would have to purchase 100 of them, so your investment would be $300.
- You can tailor your investment portfolio strategy based on your needs, industry/company preferences and risk appetite
- No management fees (which are fees you pay regardless of whether your portfolio performs or not). The only fee you pay is a transactional fee, every time you trade stocks.
- Requires a good level of financial literacy
- Involves more active management via tons of research and keeping up with business news
2. Unit Trust Funds
By investing in an Equities Unit Trust Fund. There are a variety of funds available, depending on your choice of industry and risk appetite which determines the level of exposure/investment to the stock market (eg. Balanced fund invests in a mix of Bonds and Stocks; Fixed Income funds mainly invest in Bonds).
Your invested funds are pooled with investments from other investors like yourself, and actively managed by a Fund Manager. The Fund Manager is investing the funds on your behalf, in exchange for an Management Fee. Most banks have investment arms offering unit trust funds (eg. Public Mutual, CIMB Investment), but you can also invest with other Investment Management Companies such as Eastspring Investments, Aberdeen Asset Managements).
- Low initial investment – depending on the fund, could range between RM100 to RM1000
- Diversification – Gain access to a variety of asset classes (equities, bonds, commodities etc) in various geographical regions (Asia, US etc)
- Leverage on the investing expertise of fund managers
- Imposes a variety of fees which are costly and can add up – Management fee (0.4-1.5%), Sales Charge (once off unit trust purchase cost – can go up to 5%), Annual Trustee Fees (ie. Admin charge 0.04% and 0.1%), Switching fee (ie. Fee for switching to a different Fund – RM25 per transaction or up to 6%) , Exit fee ( Cost of withdrawing from the fund – can go up to 5%)
- Requires good level of research to find the right fund such as assessment of fund manager’s track record, fund’s past performance
3. Private Retirement Schemes (‘PRS’)
PRS is a voluntary contribution scheme that allows individuals to save for retirement. This scheme is administered by Private Pensioner Administrator Malaysia (PPA) in partnership with PRS providers which are also mostly unit trust providers. A wide range of funds are offered for every level of risk appetite, from conservative to growth and there are Shariah-Compliant Funds as well.
- Enjoys the benefits of investing in unit trust with the added tax relief for contributions up to RM3,000.
- Instills discipline as money is locked away and earmarked for retirement, but yet offers more flexibility in investment choices based on your risk appetite, compared to Employer Provident Fund (EPF).
- Rigidity of withdrawal options. 70% of the Funds can only be withdrawn at the retirement age of 55 years, whilst the remaining 30% can be withdrawn only after a year of enrolment for selected reasons such as general purpose (8% penalty), housing and healthcare purposes.
- Subjected to the cons of unit trusts as well which includes high variety of fees
4. Robo advisors
Robo advisors are, (as its name suggests) ‘robotic’ financial advisors where algorithms are at the heart of investing. Compared to unit trust, where professional fund managers are stock picking on your behalf, robo advisors are digital platforms that automate that process. It’s touted to have lesser human intervention than unit trust investing, leading to more rational investment decision making.
Robo advisors are relatively new in Malaysia and mainly comprises of these following players : Stashaway, Akrunow, MyTEO, Raiz, BEST invest and Wahed Invest. Most of these roboadvisors invest in Exchange Traded Funds (ETFs) all around the world, mainly in US.
- Lower fees due to its heavier reliance on automation – ranging between 0.2 – 0.8%
- Passive investing – you decide on your risk appetite, and your funds get allocated to one of the series of portfolios offered on a platform, accordingly.
- Great user interface – you can easily monitor the performance of your investment via an app
- Limited variety of portfolios – unlike unit trusts that offers a wide selection of portfolios to choose from, robo advisors have a few pre-fix portfolio for each risk appetite level
- Success of investment is dependent on the capabilities of the algorithm – unlike unit trust, where you can research the track record of certain funds, there is less transparency with the algorithm of these platforms
I do personally invest in Stashaway to gain some exposure in the US market (they mainly invest in US ETFs) so if you are interested to explore, you can use my referral code and we both get up to RM30,000 managed for free.
5. Investment-linked Insurance Plans
An investment-linked insurance plan (‘ILP’) is a 2 in 1 plan which delivers protection and serves as an investment. A regular insurance plan will provide a specific payout if something untoward happens to you, in exchange for regular premium payments vs an investment-linked insurance plan which will do the above and invest a portion of your premiums to provide a return. (It’s like getting a shampoo which can also be used as a handwash lol).
The premiums are invested in funds (similar to unit trusts) of your choice. So the difference here is that instead of using a separate pool of funds to invest into a unit trust, a portion of your premiums are used instead.
- Flexibility – ILPs offer premium holidays – whereby policyholders can opt to put a pause on premium payments to channel funds for more urgent use, while still receiving insurance coverage. This is because the investment portion of the plan will be sold to cover the cost of insurance charges.
- Potentially higher return than regular insurance plans – if the performance of your funds goes well, you could end up receiving a higher payout.
- Complexity in data analysis – making it difficult to truly assess the performance of your plan – Think assessing your regular investment portfolio is complex? now throw in insurance calculation to the mix..
- Risk – as with all investments, there is no guarantee of returns. (This is just my humble two cents – insurance serves to mitigate risk, adding investment into the equation is like increasing the risk, which I find quite ironic. It’s like the golden rule, never invest your emergency funds. If you do, ensure you truly understand the plan you signed up for.)
Disclaimer: This does not constitute as financial advice and I’m not a professional /licensed investor. I’m merely sharing what I am learning in my personal finance journey, Before making any investment decisions, do carry out the necessary due diligence/speak to a professional financial advisor.
Love it? Pin it!
See you in the next blogpost! xx
Check out other articles within the ‘Lets Talk Money’ blog series.