AFP assignment 1 - Topic: Savings, spending and investment opportunities in Malaysia PDF

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CIX 2003Applied Financial PlanningTopic: Savings, spending and investment opportunities in Malaysia2019/2020 SEMESTER 1Lecturer: Dr. Md Mahfuzur RahmanCONTENTS PAGE1 Introduction 12 Trend2 Inflation 2 Spending2 Saving2 - 43 Saving and Investment opportunity 4 - 84 Scenario 8 - 125 Recommendation and...

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CIX 2003 Applied Financial Planning Topic: Savings, spending and investment opportunities in Malaysia 2019/2020 SEMESTER 1 Lecturer: Dr. Md Mahfuzur Rahman

CONTENTS

1.0 Introduction

PAGE

1

2.0 Trend 2.1 Inflation

2-4

2.2 Spending 2.3 Saving

3.0 Saving and Investment opportunity

4-8

4.0 Scenario

8 - 12

5.0 Recommendation and Conclusion

13 - 14

1.0 Introduction Saving is income not spent, which means the amount of disposable income earned in a given period of time subtracts all the cost of current expenditure. Savings can be known as physical investment as it can increase our income through investing in different investment vehicles. There are several ways of saving include putting money aside in, for instance, a pension accou nt, an investment fund, a deposit account, or as cash. According 50/20/30 budget rule, it divides the aftertax income, spending 50% on needs and 30% on wants while allocating 20% to savings. Moreover, the ideal amount of emergency fund is three to six months of our monthly income. “Stuff Happens, or the Importance of Liquidity”. This shows that saving is one of the portions that we cannot overlook in financial planning. Spending is defined as the use of goods and services by a household. Spending is the largest part of aggregate demand at the macroeconomic level. Throughout the economy, consumers decide which products to consume based on the price and availability of the good as well as their own needs and wants. There is a relationship negative between spending and saving. When the spending of a household increases, the saving of the household will decrease. “Waste Not, Want Not - Smart Spending Matters”. Therefore, we need to spend our money wisely. Investment is an asset or item acquired with the goal of generating income or appreciation. In an economic, investment is the purchase of goods that are not consumed today but are used in the future to create wealth. Investment is oriented toward future returns, and thus implies some degree of risk. There are two main types of investment which are lending investments and ownership investments. Different time horizon, capacity for risk, financial situation and risk tolerance will have different strategy of investment. “Risk and Return Go Hand in Hand”. Therefore, asset allocation is the most important investing task when we investing.

2.0 Trend in Saving, Spending and Inflation in Malaysia

2.1 Inflation

Year Inflation Rate (%)

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

0.58

1.62

3.17

1.66

2.11

3.14

2.10

2.09

3.87

0.88

Table 1：Inflation rate in Malaysia from 2009 to 2018

Based on figure 2, the inflation rate in Malaysia over the past 10 years show a fluctuation trend. From year 2009 to 2011, the inflation rate increased significantly. However, there was a dramatic drop occurred in the year 2012 and 2018. The highest inflation rate was in the 2017 which around 3.87% while the lowest inflation rate was in the year 2009 which around 0.58%. According to The Star Online, 2017, the highest inflation rate in 2017 was because of the transport costs climbed on higher fuel prices. The sharp decline of inflation rate in 2018 was due to the base effects from the substantial fuel price (The Star Online, 2017). This shown that the inflation rate is closely related to the price of daily necessities expenses. 2.2 Spending

Year

2009

2010

2011

2012

98.79

122.70

142.92

156.12

2013

2014

2015

2016

2017

2018

167.49 177.21

160.38

162.71

174.13

203.19

Spending ($ Billion)

Table 2: Malaysia Consumer Spending from 2009 to 2018 Malaysia consumer spending shows a steady increased from 2009 to 2014. However, there was a slight dropped of $16.83 billion in the year 2015. After that, the spending shows constant

2

increased until year 2018. The highest consumer spending over the past 10 year is in the year 2018 which achieve $203.19 billion whereas the lowest consumer spending is in the year 2009 which is about $98.79 billion. This condition is because of the rise in disposable income which cause the purchasing power to increase and the government’s move which reduce the individual income tax rate by 2% (The Star online). The decline of spending in 2015 was due to several reasons which were GST, weakening of ringgit, higher credit card requirements and decline in inflation rate. The implementation of GST causes the goods and services charged at a rate of 6%, thus the price of goods expected to increase by 1.8%. Due to this condition, many consumers applied wait and see approach which causes the consumer spending to decrease. The devaluation of ringgit causes the raw materials were imported with a high cost and lead to the reduction in purchasing power. The Bank Negara Malaysia (BNM) changed the minimum income requirement to applied for a platinum credit card which target the high income consumer. Hence, this causes the credit card benefits and privileges reduced and discourage the consumer spending in 2015 (Surendra, E, 2015). To conclude, the spending trend in Malaysia is increasing and it’s strongly influenced by government’s policies and the situations of economic.

Year

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Savings

33.36

33.47

34.08

30.92

29.42

29.37

28.16

28.26

28.53

25.93

(%)

2.3 Savings

Table 3: The Malaysia Gross Savings (% of GDP) from 2009 to 2018 The graph of Malaysia gross savings (%GDP) shows a gradual increased from 2009 to 2011 but the saving dropped from 2012 to 2015. In the year 2016 to 2017, the gross saving increased slightly and then decreased sharply to 25.934% in 2018. The highest gross savings in Malaysia was 3

in the year 2011 which achieved 34.082% whereas the lowest gross domestic savings was in the year 2018 (25.934%). The decline of the gross savings among Malaysian may be due to the increase in the household debt and the income inequality which causes Malaysian has less income that can be save (FMT news). After the global financial crisis occurred in 2008, the gross savings start to increase slowly from 2009 to 2011. The gross domestic savings were affected by few factors such as the interest rates, Consumer Price Index (CPI) and Gross National Income (GNI) (Hashim et al, 2017). In the year 2012, the gross savings declined sharply from 34.082% to 30.915%, this is because the spending in malaysia increased from $142.92B to $156.12B. Increase in spending will decrease in saving. When the saving of Malaysian lower, the investment also decreases because Malaysian lack of money to investment. The gross saving in 2018 is the lowest, this may because of the income inequality become serious in Malaysia. This mean that B40 group in Malaysia is increased throughout the years and probably they only have limited money to save.

3.0 Saving and Investment opportunity There are a lots of saving and investment opportunities in Malaysia. Below are some of the common saving examples in Malaysia. General Saving Plans -

Fixed Deposit Account and Islamic Fixed Deposit Account can only be withdrawn upon maturity date but bear the highest interest rate.

-

Saving Account bears a higher interest rate than Current Account but it has certain limitations and restrictions over the withdrawal of funds.

-

Current Account bears a lower interest rate than Fixed Deposit Account and Saving Account.

Education Saving Plans

4

-

Provided by banks such as Premier Education Savers by Maybank and Malaysian insurance companies such as Allianz EduPlus by Allianz Malaysia.

-

Provided by Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN) through Skim Simpanan Pendidikan Nasional (SSPN-i) to fund Malaysian’s tertiary education.

Retirement Saving Plans -

Provided by insurance companies such as ManuWealth Assured Series by Manulife Malaysia and bank such as Premier Life Income by Maybank.

-

Employee Provident Fund (EPF) manages the national compulsory savings plan for those who are employed in the Malaysian private sector.

-

Pension Scheme for individual employed in the Malaysian government sector.

Below are some of the common investment examples in Malaysia. Type of investment

Description

Time horizon

Amanah

ASNB was created by a Government linked

Minimum

Saham

investment

timeframe for the

National

Nasional

Berhad

instruments for all Malaysians. ASNB is like

with no maximum

(ASNB)

unit trust, you put your money to PNB’s

limitations.

company Berhad

to

called

Permodalan

provide

investment

Expected Return

Risk

6-10%

1/10

8-10%

1/10

return is 1 year

investment pool and PNB will invest this money and provide you a dividend yield at the end of each financial year. Amanah

ASB is a type of ASNB fund designed

Saham

especially for the Bumiputera to offer them an

Bumiputera

alternative mode of saving. The nature of

(ASB)

ASB is same as ASNB, the only difference 5

Same as ASNB

that it is only applicable to Bumiputera only. Tabung Haji

Tabung Haji is designed by Tabung Haji for

Minimum

the special purpose of saving for Hajj

timeframe for the

4-8%

3/10

(Pilgrim) for Malaysian Muslims. Muslims are return is at least 2

Unit Trusts

eligible to invest if they have never been to

years to enjoy

Hajj before and aged between 14-55 years

with a maximum

old.

of 5 years in total.

Unit trusts same as Amanah Saham Funds

No minimum

Between

where you

timeframe, keep it

8.72%

investment pool with other investors who

as long as it is

and

share the same appetite of security portfolio

giving you a

14.28%

as yours. The fund manager invests this

return that you

each year

pooled funds into diverse portfolio of assets

are happy with.

for pass

put

money

in

a collective

and you receive a yearly return from your invested funds in the form

6/10

20 years.

of income

distribution. Real Estate

REITs provides the opportunity to invest in

Minimum

Investment

property with low capital and it is similar to

timeframe for the

Trust (REITs)

trust funds with the only exception that this

return is 3 months

5/10 12.99%

investment pool manages property stocks only. Exchange

ETF follows an index fund on the market and

Free to buy and

Based on

Traded Funds

the composition of securities holds is similar

sell units of ETF

what

(ETF)

to the benchmark index fund. You can buy

directly from

types of

and sell the ETF fund units in the market

Bursa Malaysia.

ETF you

6

5/10

whenever you are and it will be exposed to

choose.

the market risk and your investment will impact as to how your securities perform in the market. Stocks

Bonds

The stock price is related to the company’s

No minimum and

Depends

reputation and performance. The stock price

maximum

on the

will increase when the company does well

timeframe

nature of

and you are entitled to gain dividend at the

the stock

end of the year. Investing in stocks will get a

that you

higher return compared to other securities.

purchase.

Lending money to other parties for specific

Available for short

period of time. You will receive coupon

term to long term

payment interest income at a fixed rate and

period.

3.83%

8/10

4/10

principal amount at face value when it’s mature. Equity

An alternative investment platform where

Long term

Around

Crowdfunding

early growth companies raise money to fund

investment

20-30%

(ECF)

their projects. Equity crowdfunding allows you

10/10

per year

to directly invest in these projects or ventures in exchange for shares of the companies via online platform. Forex

Foreign Exchange (Forex) is the concept of

Sensitive to time.

Depends

trading currency. All of the currencies have an

The rates are

on the

exchange rate, the more expensive the

fluctuating and

exchange

currency’s exchange rate, the greater is the

some just hold for

rate

7

10/10

currency’s value.

a few seconds to

prediction

a day.

4.0 Scenario Scenario I (High risk tolerance) Ahmad have a good practice of saving and gain from some investment activities. He had some good investment experience and had gained some profit from those investments. The amount of his saving and gained from the past investment currently is RM 20,000. Currently, he didn’t plan to buy a house as his parents already brought for him. The only financial burden for Ahmad now is to pay off his credit card bill payment and education loan. Now, he wishes to buy a car and get marry in a few years later but he realized that RM20,000 is not enough for him to do so. What can he do? First and foremost, it’s good that Ahmad had defined his financial goals clearly which is to buy a car and get marry in a few years later. His financial goals are considered as intermediate-term goals which is a goals for 1 to 10 years. So we can assume that Ahmad has a high risk tolerance as he is in the stage one of financial life cycle which is wealth accumulation phase and the liabilities that he has can be considered as low because he currently only need to pay off his credit card bill and education loan. Besides, Ahmad also have experience of investing which means that he has some certain financial knowledge. So to achieve his financial goals he needs to have a financial plan first as “Nothing Happens Without a Plan”. Since Ahmad had RM 20,000 of his saving, he can use the RM 20,000 to do investment activities to achieve his goals. However, it’s discouraged to use all of RM 20,000 to involve in investment as a good financial planning should consider “Stuff happens, or the Importance of Liquidity”. So he is recommended to exclude at least 3 months of his monthly salary from the RM 20,000 as his emergency fund. 8

Since Ahmad have two intermediate-term goals which means that the return from the investment activities should be relatively high in order to achieve his goals. “The Best Protection is Knowledge”, Ahmad has some certain financial knowledge and has involved in investing activities before, therefore, Ahmad can gradually try to involve in high risk investment as well as speculating as the return for speculating is higher. For example, Ahmad can begin to involve in speculating activities such as investing in gold with 5 -10 % of his remaining saving after the contribution emergency fund. Besides that, as Ahmad is Malay and bumiputera, he is qualified to invest in Amanah Saham Bumiputera. Ahmad should take this advantages and invest most of his money in ASB as the return of ASB is quite high with 8-10% of dividend and low risk. This is because ASB is under Permodalan Nasional Berhad (PNB) which is Malaysian government-linked investment company and now is one of Malaysia's largest fund management companies in Malaysia. Besides, ASB has no upfront payment such as processing fee or management fee which means that the cost of investment is also very low. For example, Ahmad can invest 70-80 % of his saving in ASB as ASB is one of the stable and high returns investment tools in Malaysia. There is no reason to reject a high return but low risk investment. As Ahmad has certain financial knowledge and his risk tolerance is quite high, Ahmad can also invest 50-60% of his saving in bonds, mutual funds, ETF, REIT and stocks. Ahmad should take note that the higher the return, the higher the risk. Instead of investing in only one type of industry, Ahmad should go for different type of industry and investment tools. This can help to lower the risk of investment through diversification. Last but not least, Ahmad can invest 10-15% of his saving in Forex or Equity Crowdfunding. Both of these investments have a relative high return and risk compared with others because both involve a lot of uncertainty. To conclude, Ahmad risk tolerance is high, so he can try to invest in high risk investment tools to gain a high return. However, before he

9

invests, he should have read and understand the Investment Statement that explains details about the investments clearly. Scenario II ( Medium risk tolerance) Kevin and Karen have their first child. They have a combined income of RM 10,000. Every month they have no saving as they have to pay off their house loan, insurance policy, car loan, credit card bills and other expenses. After having their first child, they realise that they must start planning for their future financial. When asked what their goals are Kevin replies that he’d like to save for retirement and Karen mentions her top priority as saving for their first child education expenses. What financial advice can you provide to them? First and foremost, Kevin and Karen have to change their spending habit and have a plan on saving. “Nothing Happens Without a Plan”. They have to plan to save first before they spend as it’s easier to think about spending than about saving. Saving must be planned and they are recommended to have at least 3 months of their monthly salary as their emergency fund. It’s recommended to save a minimum of 20 percent of our monthly income and 12 percent to 15 percent of that should go toward our retirement accounts. After they have sufficient saving for their emergency funds, they can start to focus on t...