When playing it safe might not be that safe after all

Q & A on financial planning 

Q: I CURRENTLY have about RM120,000 in my FD, which only provides me a 3.8% annual return. Can you suggest any other safe methods of growing it faster? As you know, our inflation rate is about 6% per year, which means my money is at a losing rate of 2.2% (6% to 3.8%) if I keep it in FD.
SW Yeoh

A: Congratulations on realising that placing your hard-earned savings in fixed deposit (FD) is not as safe as many people think. You are absolutely right when you said you are indeed losing 2.2% after taking into account your inflation rate of 6%. In fact, playing it safe is not “safe” at all as your money cannot grow fast enough to outpace inflation.  

From our many years of experience in helping investors achieve their financial goals, we have concluded that investors want a reasonable personal rate of return, within an acceptable level of risk. Therefore, it is important to understand that investment returns are always a function of investment risk. 

Generally speaking, the higher the sought-after investment returns are, the higher the associated risks. Therefore, you must be prepared to take risks, with a view of investing in the long term (at least three years), in order to invest successfully. 

The next step is to explore the investment options available to you such as property, stocks and unit trusts. Investing directly in the stock market is great if we have the time, skill and money required. Since most of us do not have the time or skill to invest directly in the stock market, unit trusts could be the answer for us.  

According to well-known investment author and fund manager Peter Lynch, “The Mutual Fund (unit trust) is a wonderful invention for people who have neither the time nor the inclination to test their wits against the stock market, as well as for people with small amounts of time to invest who seek diversification.” 

Before investing, you should understand the various asset classes of unit trust fund. There are three broad asset classes based on risk. The highest risk is associated with the Equity class. Second is the Bond class. The third and lowest is the Money Market class.  

The most basic question you must ask yourself when you decide to buy a particular unit trust fund is: Is it an Equity, Bond or Money Market fund?  

Each of us is in different financial circumstances. Therefore, it is very important that you meet with a qualified Financial Planner to undergo a detailed and systematic process of analysing your investment objectives, risk profile and investment time horizon.  

Without going through a systematic process, it is difficult to design the most appropriate unit trust portfolio that matches your unique risk profile and investment needs. 

Answer provided by MAAKL Mutual Bhd, a Charter member of FPAM 

Note: Financial or retirement planning requires an analysis of the readers’ personal and financial circumstances and knowledge of their goals. Without the necessary details, the answers will have to be general in nature. For a proper plan specifically tailored to the needs of each individual, they are advised to see qualified professionals. 

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