Monetary Policy Committee of Bank Negara Malaysia’s reduced Overnight Policy Rate (OPR) by 50 basis points to 2.00% after meeting on 5th May 2020. (click here for BNM press release) With this announcement, interest rates for both borrowings and savings will be adjusted accordingly. For those of you with Fixed Deposit Savings may start to feel that it may not be viable to continue placing FDs with bank. So, what should you do?
Worry Not! You can expect a lot of advertisements and posts about investment opportunities everyday. You may have received calls from someone, you know or do not know, who offered you with investment schemes. Some may even offer you new career opportunities.
Typical Conversation Starter?
Below could be some or all of the points that you would get:
Higher return! – We have a scheme with a return higher than Fixed Deposit interest rate. It will be followed by an illustration of the return.
It is safe! – This scheme was approved by Bank Negara Malaysia or Security Commission Malaysia, protected by PIDM or in collaboration with Banks and etc.
Limited Offer! – Entries into these schemes are limited as they are working very hard to offer such a high return to clients. Hence, the company only makes this offer for a limited time and limited fund size.
Free gifts! – It could be in any form – Free top-up in your investment, discounted entry cost, discount vouchers, etc.
Everything sounds familiar? Some may have invested before and some may be still considering. The purpose of this write-up is to suggest how we can make informed and rational decisions.
Important Considerations before you make an investment decision.
your investment’s purpose(s)
Why are you making this investment decision? What are the purposes of the money sitting in your FD account? Is it emergency fund? If yes, it needs to be reachable within days with minimum risk. Eg. 3-6 months of our monthly expenses. If this is the purpose, return on the investment is relatively insignificant. But this does not mean that you can opt for some other vehicles with higher return. Most importantly, the new vehicle should be able to satisfy your needs.
your Investment Horizon
This is the duration you expect to hold the investment. Taking Fixed Deposit Saving as an example, you can choose to place your FD for 1 month, 3 months, 6 months, 9 months, 12 months or even longer depending on the banks you are dealing with. How do you decide on the tenure? Is it purely based on the different rate offered for different tenure or do you include other considerations such as possible time when you may need the money?
Therefore, before you make any investment decision, you must also consider how long can you keep this investment? Are you allowed to change your mind along the way? What is the opportunity cost?
Your Fund amount
The amount of fund available to us is another key factor while deciding the type of instrument you want to utilise. Initial entry amount and costs are different for different types of investment. Stocks, Mutual Funds, Properties, Insurance Savings Plan, ETFs, P2P lending, Digital Currency Tradings and etc.
Besides initial entry amount / cost, you may also want to consider future cash flow required. Some of the investments require not only initial lump sum investment but a stream of periodical investments in future. Examples are property with mortgage loan and Insurance Savings Plan.
Understand the Risk!
Whatever investment vehicles you are considering, you should understand the risk(s) involved. Risk tolerance level is different for each and everyone of us. Investment horizon is one of the key factors affecting our risk tolerance level, others include knowledge about the products, investment strategy and a lot more. Do some researches on the web, talk to an experienced friends or professionals.
Ask the person who approached you for any investment products/schemes the risk(s) involved. Even Fixed Deposits Savings come with risk. So, eventually nothing is risk free.
- Do not simply follow what others do.
- Avoid emotional financial decisions. Fear ~ Greed ~ Rational?
- Approved scheme actually only suggests that it is legitimate, nothing to do with the risk level.
- Do some homework and be open to talk to family’s members and close friends. There is nothing so secretive that opportunity only comes to you but not others!
- Do the maths, the correct maths! With advancement of technology, you don’t have to use financial calculators for financial calculations. I will show actual return calculations using FREE APP available in both IOS and Android in my next post (within 2-3 days).
If you need personal advice or if you have anything to share, feel free to contact us.