In the last article, we spoke about how being a millionaire is no longer an option. If you missed it, read it here. This article will talk about the various methods of investments available in the market. So how do you choose the right vehicle for you? Ask yourself: • How much risk are you willing to tolerate? (A

simple benchmark could be the older you are, the less risk tolerance you have)

• Next, weigh the potential profit, against the risk the investment vehicle carries.

 

SAVING  ACCOUNTS  

What is it?

A savings account is a type of deposit account offered by most banks. The money in it can be taken out at any time without losing your accrued interest. A current account is similar to a savings account, with the exception of cheque writing facilities. A Fixed Deposit (FD) is a type of deposit account issued by most banks with a fixed interest at an agreed time frame. Most banks are under the covering of a government agency formed to protect depositors in the unlikely event of a member bank failure. That makes Saving Account relatively much safer as compared to other means. For the purpose of this article, the term “savings accounts” will also include products offered by banks (usually earns a higher interest but requiring a large amount of deposit).

Advantages of Saving Accounts as an investment:

Higher interest rates than savings accounts.

Disadvantages of Saving Accounts as an investment:

Very low interest rates. Your money LOSES value due to rising inflation! Interest is lost for cashing out a fixed deposit before its maturity date.

SAVING  IN  FD  IS  GOOD,  RIGHT?  

DEBT  INSTRUMENTS  

What is it?

A debt instrument is when an investor loans money to an entity (corporate or government) that borrows the money for a defined period of time at a fixed rate. Otherwise known as bonds, they are used to finance a variety of projects and activities. The safety of the bond is dependent on the financial strength of the entity. The riskier the bond is, the higher the payout premium is.

Advantages of Debt Instruments as an investment:

Higher interest rates than savings accounts.

Disadvantages of Debt Instruments as an investment: Less liquid than savings accounts. Its safety is purely dependent on financial strength of issuer. During periods of inflation, the face value of bonds will be worth less than when first purchased.

CASH  

What is it?

Cash, both banknotes and coins, has legal acceptance and recognition in the market. It has a trading value, and used for purchase of goods and services.

Advantages of Cash as an investment:

Standard value used in society. Readily accepted. Complete liquidity. (Liquidity is the ability to convert to cash)

Disadvantages of Cash as an investment:

Cash in itself earns no interest. Loses value in period of high inflation. Subject to fire, theft and other hazards.

 

SAVING  IN  FD  IS  GOOD,  RIGHT?  

STOCKS  

What is it?

Stock is a share of a corporation held by an individual or group. Corporations raise capital by issuing stocks and entitle the stock holders to partial ownership. Stocks are bought and sold in an exchange, hence are subject to daily fluctuations. Stock is also known as “share” or “equity”. There are two main types: common and preferred. Common stock usually entitles the investor to vote at shareholders’ meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings. There are 2 ways to invest in the stock market: • If you have the time and effort, you can do it yourself, targeting a higher return. • The alternative is to invest in a managed fund, i.e. leaving your money with an agent that

will invest for you. In Malaysia, there are many popular managed funds known as unit trust/mutual fund. Compared to doing it yourself – expectation of return from managed funds are usually lower because fund managers tend to take the more conservative approach.

Advantages of Stocks as an investment:

Benefit from profit or dividend distribution. High level of liquidity - can be easily sold and converted to cash. Unlimited potential of rising stock price.

Disadvantages of Stocks as an investment:

Ability of growth is dependent on the managerial abilities of said company. Subject to sector news, stock market condition, and other factors.

 

SAVING  IN  FD  IS  GOOD,  RIGHT?  

PRECIOUS  METALS  

What is it?

Precious metals are a classification of metals that are considered rare and/or have a high economic value. They include gold, silver and platinum, among others. Methods of investing include purchasing physical entity, getting account offered by most banks, getting investment fund in a publicly traded exchange, or purchasing futures contracts.

Advantages of Precious Metals as an investment:

High liquidity - Precious metal stocks can be easily traded on major stock exchanges.

Disadvantages of Precious Metals as an investment:

No interest generated by owning physical metal. Metal prices greatly influenced by the market (just like stocks) and governmental action.

REAL  ESTATE  

What is it?

Real estate investing includes the purchase, ownership, management, rental and/or sale of real estate for profit. Real estate is an investment type that has limited liquidity, is capital intensive and requires high cash flow. Due to its high capital requirement, it is also common for real estate investors to do it by method of using “other people’s money”, i.e. borrowing from banks as a leverage, or forming a group of people who can put together a larger sum of capital and share the gains later.

Advantages of Real Estate as an investment:

Immediate income is possible – from net cash flow of well-chosen property after deduction of debt and operational costs. High chances of real estate appreciation – as long as maintenance costs and inflation exceed rate of depreciation.

Disadvantages of Real Estate as an investment: Subject to economy and temporary value fluctuations. Not liquid investment – should only be done when you have surplus funds and then designated as long-term investment plan. Requires more hands-on management and knowledge, failing which might lead to loss.

   

SAVING  IN  FD  IS  GOOD,  RIGHT?  

COLLECTIBLES  

What is it?

These are objects that are difficult, or impossible to duplicate and have cultural, historical or social value. Some examples may include artwork, antique, automobiles, coins, stamps, sports trading cards etc.

Advantages of Collectibles as an investment:

Highly valued because cannot be replaced. Intangible benefits – for example the enjoyment of possession, the pride of ownership.

Disadvantages of Collectibles as an investment:

No interest generated by owning collectibles. Not liquid – small market or demand. High cost of maintenance and insurance.

So, is saving in a FD the best way to generate returns for you?

In the coming article, we will show you a more detailed comparison between the vehicles and how to decide the best one for your needs.