PEOPLE saving up for their retirement may wish to consider investing their monies to generate better returns rather than leaving their cash in the bank.
Of course, it is always prudent to set aside some emergency funds (financial experts suggest having an emergency cash reserve amounting to about six months of expenses), but by investing early, you benefit from a longer period of compounding returns, while giving the investment a longer time to meet your desired target (given that financial markets can be volatile over shorter time periods).
Dollar-cost averaging (DCA) is a popular investment strategy which can smooth out your investment journey, and is also practical for those setting aside a small sum of money each month towards their retirement plan.
Regular savings plan
Another option for increasing savings is the Private Retirement Scheme (PRS). Individuals who are 18 years old and above can contribute to the scheme offered by PRS providers who are private financial institutions approved by the Securities Commission Malaysia (SC).
PRS gives you the freedom and flexibility to choose funds that best suit your investment needs. There is no/minimal sales charge and you can invest a minimum of RM100 as the initial contribution per fund. You can also enjoy a tax relief of up to RM3,000 per year of assessment for 10 years starting from 2012 for your PRS contributions.
Fixed income funds
For those who are uncomfortable with more volatile investments, bond funds may be a good alternative for savings and deposits.
Bonds can offer higher potential returns compared to bank savings accounts, and are less volatile compared to stocks and are ranked as more senior – in the unlikely event of a bankruptcy, bond holders get paid before the stock holders. In addition to that, by investing in a bond fund, the investors receive the added benefit of diversification.
Equity funds for growth
Investors seeking to make their savings work harder may wish to consider equity funds, which offer diversified exposure to a basket of stocks.
As shown in Chart 1 below, the Malaysian stock market has significantly outpaced the rate of inflation over the past 29 years (since 1984), with Malaysia stocks delivering an 8.5% p.a. return (including dividends) as compared to the 2.7% compounded rate of inflation over the same period.
Since stock market performance is largely dependent on the growth of earnings over the long term, rising profits (and selling prices) have helped the stock market’s performance, and as companies represent ownership of hard assets (land, buildings, machinery), stocks are also a good proxy to the ownership of assets which can preserve purchasing power over time.
Source: Fundsupermart.com compilations, as at Feb 28, 2013. Figures are in RM, calculated using NAV prices, without any income or dividend reinvested.
This article by Fundsupermart.com Malaysia first appeared on the Fundsupermart.com website.