Is your fixed deposits giving you negative returns?

Depositors beware: You may be earning 3.15 per cent for your fixed deposits (FD), but take into account February’s inflation rate of 4.5 per cent would mean that your future purchasing power is being eroded.

The inflation rate was reported on March 28. Bank Negara Malaysia also said in its annual report released the week before that inflation will average 3 per cent to 4 per cent in 2017, up from 2.1 per cent in 2016.

When inflation – meaning the price of goods and services – is higher than nominal return (your FD interest), real returns become negative.

For example, if a person places RM10,000 in a 12-month FD at a rate of 3.15 per cent, that person will get RM10,315 at the end of the 12 months. The RM315 is the interest earned during the period. However, when inflation is pegged at, say four per cent, it means that a good or service that costs RM10,000 at the beginning of the year will now cost RM10,400 at the end of the year.

That means the person ‘loses’ RM85 after a year of keeping his or her money in fixed deposits. That is what economists mean by ‘future purchasing power being eroded.’

An invididual investor needs to understand himself or herself as well as the risk level of the financial vehicle before taking any action to invest the hardearned money.

Broadly, an investor needs to ask the following questions:

1.What is your time horizon for your money?

2.What is your risk tolerance level in investing?

3.Who can competently monitor your investment?

Your answers to the questions above will guide you on what should be done.

To further decide how and what to invest, consult an independent financial planner, instead of an sales promoter of investment funds.

Commenting further on whether to invest directly in shares or unit trust, a person needs to be mindful of the additional risks involved when investing directly in shares. When you buy shares of a particular company in the stock market, there are additional risks that you are exposed to.

For example, you buy the shares of Bank A that usually pay dividends to its shareholders.

If there is an adverse news on that bank, then the share price of that bank/company will drop. That is called company-specific risk. If there is adverse news that affect the banking industry, again the share price of Bank A will also come down. That is called industry-specific risk.

According to Harry Markowitz, who came up with the Modern Portfolio Theory, well-diversified portfolios can minimise or elimiate the two types of risks described above. Then, the only risk left is market risk.

If and when US drop some bombs on a certain country, like what they did in Syria two weeks ago, this kind of negative news/event will rattle the nerves of investors and thus the price of most of the shares in a stockmarket will come down, be they shares of banks, consumer firms or construction companies.

That is an example of market risk – the ups and downs of unit prices in a unit trust fund is mainly due to this market risk.

To sum up the discussion above, if you are not able to monitor your own share investment and cannot stomach the risks, it is a better option to consider portfolio of shares like unit trust funds.

However, these will present you with another set of challenges – how to choose among the 639 approved unit trust funds managed by 36 unit trust companies in Malaysia. Furthermore new unit trust funds are being launched from time to time.

It is wise not to base your fund choices solely on the advertising messages of unit trust companies and the sales pitch of unit trust fund promoters.

Do consult an independent financial adviser representive who has access to unit trust products from multiple fund companies and are able to advise you appropriately on your personal investment needs and objectives to achieve your financial goals.

For further enquiry, contact Lee Khee Chuan ChFC, CFP, CLU, FLMI, B. A. (S’pore), a Bank Negara & Securities Commissionlicensed financial adviser representative ( CMSRL/ B1602/ 2011) and Director, Advisory & Practice Management of Standard Financial Adviser Sdn Bhd at 016-8880138 or kheechuan.lee@ standardfa.com.