How To Make Your Investment Capital Work Harder
This article is sponsored by Securities Commission Malaysia, under its InvestSmart initiative.
Warren Buffet once said, “Never depend on a single income. Make investments to create a second source.”
Most people would agree with Buffet, who is often regarded as one of the most successful investors of all time. Given a choice, wouldn’t you want to become a successful investor like him? Fortunately, there are ways to make even a modest initial investment amount work harder for you.
You don’t need to “sacrifice” hundreds of thousands of Ringgit upfront to earn healthy returns. We have talked about this before – you can indeed invest with just RM1,000. Now, we’re going to help take your RM1,000 to the next level and maximise your investment capital.
First up, we’ll have to face the fact that investing will cost you some money. To get started in investing, you have to be prepared to pay some fees by default including management fees, sales charge, commission and a few other related fees, depending on the investment product.
This is why one of the most basic methods for achieving good returns is to opt for an investment product that does not come with these charges, or with the least of these charges.
For example, many Amanah Saham Nasional Berhad (ASNB) investment products do not come with sales charges. Here are two examples of ASNB products in comparison with the AMB Ethical Trust Fund:
RM1.00 per unit
(e.g. RM 0.2407 per unit)
(RM1 x 10 = RM10)
(RM1 x 100 = RM100)
(RM1 x 200,000 = RM200,000)
availability of units
of the Fund.
1.00 sen bonus per unit
per unit (sen)
|•2% sales charge
•1.5% annual management charge
•0.07% annual trustee fee
•1.65% annual expense ratio
* Subject to 6% GST
Both ASB and ASW2020 do not come with sales or redemption charges. In simpler terms, this means that when you sell or cash out your units, you will get the true value of the units.
Here’s how it works:
= 4,154 units
(inclusive of GST)
- Sales charge 2% – RM20
- Management fee 1.5% – RM15
- Trustee fee 0.07% – RM0.70
- Expense ratio 1.65% – RM16.50
- GST 6% – RM3.13
From the example above, earning a return of RM80 means only pocketing RM24.67 after all the investment charges are deducted. With a small capital, every sen counts, which is why it’s important to consider investment products with cheaper related fees.
Remember, not all unit trust funds impose high fees and charges, in fact some funds even periodically offer to reduce these fees. As an investor, it is your right to seek information and you should do so as much as possible.
Ringgit cost averaging
With a small investment capital, it’s even more important to ensure you are buying your investments at the right time and right price. One way of doing this is to regularly top up your investments, but this doesn’t mean that you can just pump money in on a random basis. There is an art and a science to it.
It is known as the Ringgit cost averaging concept, you essentially invest a fixed amount at fixed intervals. For example, with an initial investment of RM1,000, make it a habit of adding an additional amount every month. This ensures that you continue to build your investment while minimising risk.
This is a workable alternative to putting in a huge lump sump for the initial investment. Instead, you spread out your investment risk by choosing to invest over a period of time.
Here’s a simple table to illustrate the difference between investing a lump sum (RM5,000) versus the Ringgit cost averaging method (RM1,000 + RM364 x 11 months):
|Lump sum investment||Ringgit cost average|
|Regular monthly deposit||None||RM364|
|Investment period||1 year||1 year|
|Unit price||RM0.60 per unit at purchase||Average RM0.54 per unit over 12 months#|
|Units acquired||8,333 units||9,102 units|
From the example above, you can see how sometimes a modest capital may work better for you. Putting RM5,000 in an investment when the price is not in your favour can hurt your investment, whereas by spreading out your investment capital, you can also spread out the risk and get more units in return. Ultimately, you’ll end up with better value on your investment.
The added benefit of this is that you don’t need a huge sum to invest upfront, you can treat it as a monthly savings effort while reaping possibly greater benefits than lump sum investing. It’s a great step for first-time investors.
Invest for the long-term
You need time to let your money work and grow, which is why the best way to make your small investment work for you is to give it a longer timeframe.
Take note that the longer your investment time horizon, the more time your money has to grow thanks to the power of compounding interest. Compounding interest basically means any returns you get from your initial investment will get reinvested to earn additional interest on top of it. This works best if you do it together with Ringgit cost averaging.
With the magic of compounding interest, a mere RM1,000 investment can go a long way. Here’s the difference between a 3-year and a 10-year investment period in bonds:
|Average rate of return||5% per annum||5% per annum|
|Average annual return||RM52.54||RM62.89|
As you can see, even though you’re only investing for just a little more than three times longer, you’ll get roughly 4x the return.
So remember, investing is not just something for the affluent. You don’t need a huge sum of cash to invest. Even with a small capital of RM1,000, you can make your investment work in your favour. All you need to do is to implement the above three methods to maximise your returns.
Making an informed investment decision is all about understanding your own finances and risk profile, but to also have a clear idea of how much time and money you need to invest, as well as the necessary fees to avoid or reduce in order to obtain the maximum best returns possible.
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