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Monday, December 31, 2012

How to make an informed investment decision

Just the other day, a client asked which fund she should invest in. So I asked her a few questions to determine her risk profile. It turned out she is a moderate investor.
As a consultant I do not decide for my client. My job is to advise and recommend solutions that cater to my clients’ needs.
When I asked her what her investment objective is, she told me, “to make money”. But when I asked how much money she wanted to make from her investment, she said she didn’t know.
I asked her, what if she were to double her investment, how much time was she willing to take? And what was the return she was looking at?
If you are a first time investor, you may want to think about your investment objective. They could be retirement fund, to pay for the down payment of a house, children’s education or acquiring a painting.
Then think about your investment target i.e how much profit you would like to make. For example, if you put in RM100,000 in one lump sum, you may want your investment to grow to RM150,000 or even double to RM200,000.
Another aspect is how long you are willing to wait to see the money grow or double from RM100,000 to RM200,000.
Use Law of 72 to determine how long it takes to double your investment.
(Formula: 72/return)
For example if you put RM100,000 into EPF which gives 5.8% (round it up to 6%) return last year, divide 72 by 12:
72/6= 12
This means it takes 12 years for your investment of RM100,000 to double to RM200,000.
However if you invest the RM100,000 into a fund which can give you a 12% profit per year,
72/12=6
This means it takes 6 years for your investment to double its growth from RM100,000 to RM200,000
Unit trust is a medium to long term investment. So make sure your time frame is no lesser than three years or you will risk losing your capital.
It is also important for you to be aware of your risk appetite. If you are a conservative investor you may want to go for a fund which is low risk yet provide consistently low return. If you are a moderate investor, you should invest in a fund which has medium risk and provides moderate return. As for aggressive investor, you may want to consider a fund which has high risk and give high return.
There are many funds available in the market, choose one that suits your needs. Make an informed decision and invest wisely.

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