ISLAMIC FUNDS IS POPULAR AMONG MUSLIM & NON-MUSLIM AS
PER BELOW REASONS;
1)RESILIENT NATURE OF SHARIAH-COMPLIANT FINANCIAL SECURITIES, NO EXPOSURE TO CONVENTIONAL BANK AND OTHER FINANCIAL STOCKS, THEY HAVE MANAGED TO AVOID THE EFFECTS OF THE U.S. SUB-PRIME MORTGAGE CRISIS. 2)AS QUANTITATIVE FILTER, SHARIAH-COMPLIANT ARE SUBJECT TO RESTRICTIONS ON THE AMOUNT OF CONVENTIONAL LEVERAGE PERMITTED AT THE PORTFOLIO COMPANY LEVEL.
Does Compound Interest Really Apply to Unit Trust Investment?
UNIT TRUST is an easy means of obtaining a spread of INVESTMENT. It is suitable for passive investor, who doesn’t want to, or doesn’t have extra time to invest their cash savings. For an investment capital to grow, we must not underestimate THE POWER of COMPOUND INTEREST what Einstein calls the “8th WONDER OF THE WORLD.”
Question from investor:
Does compounding interest really apply in unit trust? if so, can you show me how does it apply? If possible, please include how to forecast an investment in unit trust. For example, if I invest RM10,000 today in equity fund, what will i get in 20 years time? In fact, the answer can be “yes”, and also “no”. It depends on how you apply the power of compounding interest. If you know how to apply it, unit trust really shows you the power of compounding effect. If you are not mentally prepared, the power of compounding interest is just a myth.
What is the power of compounding interest?
Let’s look at the definition of compound interest:
Interest that accrues when earnings for a specific period are added to principal; thus interest for the following period is computed on the principal plus accumulated interest.
It means you don’t withdraw the interest earned from you capital. Just let the return stay in your investment account and let it compounds. Your next interest return will be calculated using the accrued principal plus interest.
For example, you save RM1,000 in a Fixed Deposit account giving you 4% interest return per annum. Provided that you don’t withdraw any sen from the account, your account balance will look like this:
After 10 years untouched, you will have a total of RM1480.24 in your FD account. If you keep the money there for another 10 years, it not only earns you another interest of RM480.24, but a total of RM1,191. Leave it there for 50 years, you will get a magnificent total of RM7,107.
The growth is exponential. The most interest earned is at the last few years. The exponential growth will be more significant towards the end.
How to “employ” compound interest?
Imagine you have a loyal employee called “compound interest”. He will work for you day and night non-stop. All you have to do is not to disturb him at work. Let him concentrate to do his job for you. At the end, he will definitely deliver the magnificent results for your hard earned money.
In order to enjoy the power of compound interest, make sure you provide the perfect working environment:
1. Start saving and INVESTING AS SOON AS POSSIBLE.
2. Let your savings and investment accrued and compound as long as possible
3. Try to get the best investment return with bearable risk
How to apply compound interest in unit trust investment?
No matter where you put your money, provided the money is still yours, compound interest will work for you. Consider the following places where you save your money
under your pillow - compound interest still works, but with 0% interest rate.
in saving account - compound within 1-2%
in fixed deposit account - compound 2.5 % p.a.
in unit trust - compound with a wider range, say -5% to 20%
in shares - compound with an even wider range, say -50% to 100%
in properties - hard to predict. If you buy a house that’s never completed, you lost your capital plus interest charges of your mortgage. However, some experienced property investors can get their money compounded many fold per annum.
But if you spend the money instead, I guarantee that compound interest won’t work for you anymore, because the money is no longer yours.
You can even use borrowed money to invest. For instance, you get a home loan to buy house, or borrow money from your parents to invest in stocks. If you manage to get a higher return than the interest charges, compound interest is working for you.
But if you borrow money to spend, compound interest is working against you. The harder it works, the poorer you are.
In order to let compound interest works its wonder in unit trust investment, you should:
1. Never repurchase your fund unit - let your capital stays in there as long as possible. When you want to lock the gain from time to time, use switching facility.
2. Review your portfolio performance regularly - make sure it is giving you positive return as often as possible
3. Invest as early as possible - start investing when you are still young. It will give you the longer term to invest and get through all the equity roller coaster ride when you reap the return at the end.
4. Invest as much as possible 5. Never get tempted to spend your earning - just leave your return in the fund. Forget about it! Leave it until you reach your financial freedom.
How much can you get from RM10,000 initial investment after 20 years?
Use the compound interest formula to calculates the value of a compound interest investment after ‘n’ interest periods.
FV = PV( 1 + i )n
where:
‘FV’ = Future value after ‘n’ interest periods.
‘PV’ = Present value of Principal, the amount invested at the start.
‘i’ = the interest rate applying to each period.
‘n’ = the number of interest periods (number of years for per annum computation)
From the reader’s question above,”If possible, please include how to forecast an investment in unit trust. For example, if I invest RM10,000 today in equity fund, what will i get in 20 years time?“. In this case,
PV = RM10,000
n = 20 years
i = whatever annualized return you think your equity fund can produce
When i = 10%
FV= RM67,275
When i = 15%
FV = RM163,665
When i = 25% (Hey, this is better than Warren Buffett’s portfolio, the world’s best investor)
FV = RM867,362
In fact, it depends on how your investment portfolio is doing for the long term. Sometimes an EQUITY can give you 40% return in a year. Sometimes it makes a loss of 30% in extreme bear market. If your portfolio can produce 15% return per annum consistently, that’s already marvelous.
Summary for Action
Through the power of COMPOUNDING, a small amount of money over time can grow into a substantial sum. Investments can increase in value over time - and the longer the time frame, the greater the value. This is achieved through returns that are earned, but not spent. When THE RETURN is reinvested, you earn a return on the return and a return on that return and so on. Therefore in order to benefit from the power of compounding returns, you must invest as much as possible, in a lump sum now! And keep on investing or saving whenever you got spare cash. Just don’t spend it!
INVEST NOW!
CALL ME WITH NO OBLIGATION,
ANUAR BIN ASPURI
UNIT TRUST CONSULTANT
+6019764 6651
It is expected that interest rates will be cut by the federal banks to reduce the cost of borrowing. Hopefully this will help some businesses to get through their cash flow problem. At the same time, it may “encourage” people to take the money out of their saving accounts, and use it at other areas such as investment, or just simply spend it to help drive consumer spending.
The lower interest rate affect the return of the poor since most of them don’t know what to do with their money except keeping it in the fixed deposit. How about borrowing money to invest (buying properties etc)? The poor don’t know where to invest. Moreover, banks are reluctant to lend money to them, especially during a recession.
How about the rich? They can borrow money at lower cost because the banks know that the rich are capable of making more money out of the loan.
Falling housing sales and reduced equity values
In the subprime incident, poor people borrow more money on their own inflated residence. When house price drops, they owe bank more money than the value of their home, causing negative equity.
You may say that the rich has more real estates, and mostly acquired for investment purposes. Yes, in fact the rich lose more value in their properties holding. But don’t forget that the rich buy properties for the rental income yield. For the worst case, they may have to sell a few properties at a significant loss. Yet, they are still rich. For instance, they make $50k per month from rental properties during good time, but only make $30k during this recession. Anyway, they still make more money than the poor.
Companies are downsizing
The rich own the companies. They downsize by firing the poor, so that they can keep their money and companies.
Inevitably, their companies’ valuations tumble. Let’s say from $100million to $50million. They are still multi-millionaire. They still drive a big car. They still stay at their comfortable home. They still go for vacation.
But the poor has lost their job, in deep debt, and find themselves very difficult to find jobs elsewhere.
Who suffered the most?
The poor or the rich? Being rich doesn’t make you recession-proof. But the poor will definitely be suffering more than anybody else,
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