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Monday, June 8, 2015

Savings vs Investments (Unit Trusts)

The primary aim of savings is to protect the real value of money you put away, while investments are meant to grow its value. In short I believe that you need both. Savings for short term use and as an emergency buffer or reserves. Investments for your long term goals and needs (>3 years).

Savings: Savings Accounts / Fixed Deposits
Pros of Savings:
Keeps value of money intact and provide small returns as determined by interest rates. Usually always available when you need it. Minimal risks and usually guaranteed by banks or by the government. Finally it requires very little financial knowledge.

Cons of Savings:
Little increase in value over time. Currency fluctuations and inflation may significantly diminish its value. **
** Banks use your money (from savings account or FD) to provide loans and in return distribute a portion of their profits in the form of interest on your savings. Central banks control the interest rate based on inflation numbers and therefore savings can only return a slightly higher than forecasted rise in cost of living otherwise known as inflation to ensure that the value of your savings does not. This is WHY it is only good as a short term use.

Investments: Equities (shares in company) / Bonds / Property / Unit Trusts
Pros of Investments:
Grows the value of your money and may return several times the amount of your initial investment.
Helps you build a nest egg for your retirement, children's education fund, vacation and etc. Most of the time the value of investment tends to correlate to inflation.

Cons of Investments:
Risk level varies but generally higher than savings. Money usually locked in for a period of time or at least not straight forward to cash out. Requires a good amount of understanding the product and market.

As you know 20% of my portfolio is based on Unit Trusts, a figure which I would like to see increased in the coming years. Here are the benefits I see (from highest order to lowest):

Portfolio Diversification - investor has access to broader range of securities (Malaysia / Asia / Global) than you could if investing on your own. this also minimizes exposure to any one type of risk.

Access to Broader Array of Financial Assets - in Malaysia a normal investors cannot directly invest in government or corporate bonds. Fund Managers have access to those.

Asset Liquidity - you can buy and sell units anytime as compared to trading shares of companies where prices and opportunities to transact depends on availability of both buyers and sellers.

Affordability - require minimal amount of investment as most funds accept both small (for as little as RM 100) and large investments.

Continuous Professional Management - funds run by full time and professional managers who have necessary skills, relevant experience and dedicated resources to maximize investments. **
** NOT all funds are managed well. One must know how to filter good ones out as posted previously It will pay extremely WELL if you do your homework.

Global Fund on Equities (shares on company)

Asia Bonds (a type of corporate loan)

Asia Pacific ex Japan Equities (shares on company)

Malaysia only Equities (shares on company)

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