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Turning A New Page For SMEs

Low technology literacy has created a digital divide amongst businesses in Malaysia, with the common assumption that SMEs are less likely to access and use the internet when it is massively beneficial for them to do so. According to a report by World Bank Group in 2018, only one in three SMEs in Malaysia have implemented digital transformation strategies, while less than a quarter have a dedicated digital strategy team. Despite being the backbone of the country’s economy, SMEs in Malaysia performed rather poorly in adopting digital changes.

SMEs are also susceptible to the practice of only adopting fundamental technologies for their operation—missing out on the more extensive digital solutions that could ensure their operation to remain robust in the long run. As one of the leaders spearheading digital transformation in various industries, the experts at JurisTech notice that there is an uninformed fear of the change brought on by digitalisation. This is not only specific to SMEs, but also applicable to almost every industry; with most citing ill-suited employees, lack of funding and technology experts for guidance as the reasons they lack the initiatives to start the transformation.

Accelerating The Digital Transformation of SMEs

Prior to the global pandemic in 2020, there has been a lag in digital adoption in Malaysia behind the global average. The struggle is not only felt by SMEs, but also technology providers, as there is a gap of knowledge differences between both parties. SMEs are afraid to reach out for help due to the perception that the cost will eventually be too taxing for them to run their operation and digital transformation simultaneously, while technology providers find it difficult to penetrate the market with low technology literacy amongst SMEs decision-makers.

However, with the current economic climate and new regulation implemented by the government, SMEs in Malaysia are slowly acknowledging the importance of upgrading their current hardware and software infrastructure—where previously wondering how much would the transformation cost them, it is now a question of “how soon can we digitalise our existing processes?” SMEs now recognise digital adoption would enable them to continuously push through the periods of respective lockdown and semi lockdown, allowing them to remain operational and to create further stability in 2021.

The demand is also spurred on by the need to be paperless and cashless. Besides that, 2020 taught many of us the importance of interpersonal interaction. While the face-to-face interaction was greatly reduced to lessen the effect of the pandemic, it has also speared the movement to innovate existing customer service technologies. An interactive, personalised chatbot is no longer sufficient; SMEs now have to find a way to not only attract and retain customers, but also to create a seamless customer onboarding process. This will help SMEs avoid drop-offs, increase customer acquisitions, and adhere to the lockdown regulations that are in place.

The new digital transformation program rolled out by MDEC along with encouragement from our government drives the awareness for digitalisation and creates a bridge for many tech companies to offer their expertise to these businesses. SMEs now have a clearer idea of which areas of their operations are direly in need of digitalisation and can create a rising demand for it. This in turn allows technology providers to further enhance the existing features of their products to adapt to SMEs needs, just like JurisTech’s CollectXpress, an invoice-based collection recovery system and Juris Access, a digital customer onboarding platform developed with SMEs in mind.

Acknowledging The Need For Digital Transformation

Although the lockdown restrictions have been gradually lifted to encourage the recovery of the nation’s economy, many SMEs continue to operate remotely, cutting back on physical operation cost and manual processes implementation, allowing them to redirect their resources into upskilling their talents. This signifies a good start in many industries as it accelerates the digital adoption that has not seen satisfying progress in the last few years, as previously Malaysia was behind many of its neighbours in terms of technology utilisation.

Most importantly, this indicates an increase in technology literacy amongst SMEs in Malaysia; as this shows a willingness to explore more extensive digital platforms to be included in their operation to remain relevant in whichever industry they are in. In the upcoming future, we can expect more SMEs will continue to grow alongside the ever-changing technology of today and forming active collaborations with technology providers that allow the development of more digital platforms aligned to their needs without the fear of disrupting ongoing business.

About the author

Nuralia Mazlan is part of the marketing and communications team at JurisTech, a leading Malaysian-based Fintech company, specialising in enterprise-class software solutions for banks, financial institutions, and telecommunications companies in Malaysia, Southeast Asia, and beyond. You can reach out to them at contact@juristech.net

March 25, 2021
Turning A Financial Emergency Into A Minor Inconvenience

In my previous article, we covered tips for saving for an emergency fund. In this article, let’s take a deeper dive into other matters related to savings for a financial emergency.

Food for thought, would you consider your credit card your emergency fund?

I guess there is no right or wrong to this statement but it does help that at least we have an emergency fund that’s equal to the credit limit of credit cards. If we have to rely on it to get past an unexpected expense as a last resort, we know very well that we’re able to pay it off without carrying the balance to the future.

So, it’s not wrong if you consider your credit card your emergency fund. However, there’s one problem. In a scenario where you don’t have to rely on credit or loans to save you in a financial emergency, you don’t really have any pressure or commitment to repay it after the emergency has passed.

When you rely on credit to get you out of financial emergencies or unexpected events, once this issue is resolved, you’ll then need to deal with the next time bomb. Depending on how well you’ve prepared and managed your money before this, it could lead to another emergency in the near future. Assuming your money management skills haven’t improved in that time, you might be looking at an even more dire situation!

Firstly, in this second ‘crisis’, you may have less or no capacity to increase your loans or credit limit to help you (since there’s a good chance those limits have been utilised and not cleared from the first time). On top of that, let’s assume for a second that you can still count on credit cards for this second bout; how do you think your monthly cash flow situation will be like after this?

Certainly a much bigger portion of your future income is now tied to repaying those debts. This will reduce your discretionary cash flow (or disposable income), meaning your ability to save for a ‘real emergency fund’ is now much weaker compared to before. Moreover, with lesser discretionary cash flow, it also implies that you are likely to be unable to prepare or save for other future dreams. In a worst-case scenario, you might be playing musical chairs with your debt, using the income you take home each month. If such a pattern is maintained, it may affect your overall satisfaction with life, and even lead to a compromise in your mental health.

So, there seems to be a cost to treating your credit cards’ limit like an emergency fund, and this is more costly than monetary cost (interest rate). It comes with a much bigger price tag like your freedom and ability to plan for the life that you really want to live.

If you’re thinking about keeping a certain card’s limit as your emergency fund, why not consider the alternative that’s much less complicated, and most likely comes with less pain in future?

I get it – this alternative comes with a pain today, as it requires us to not spend that amount of money, save it up, stash it somewhere, and forget that we have that money. With our brain wired to seek pleasure, and that instant gratification is a sure way to reward us with such pleasure, this could be a tough call for some people.

Is there a way to avoid having to sacrifice your lifestyle today while still able to prepare for emergencies? I’d say YES. There are certain emergencies that we can actually ‘neutralise’ and make it a non-emergency. Based on common ‘emergencies’ people have told me about, here are some and how you can prepare for it:

Your Real Expenses

Have you had this experience where you were shocked, or even found yourself wondering how a certain bill that should be due a long time from now ‘suddenly’ becomes payable? For example, your car insurance and annual road tax renewal, your car’s battery that gives up on you every one or two years, your yearly subscription to certain services, yearly insurance premiums etc.

The truth is, these bills don’t suddenly become due today; it’s just that time really flies and while looking at the new renewal or invoice, your mind tells you you’ve just paid for it not long ago. Just like this, you have landed yourself in a financial emergency. You may not have sufficient money at that moment to pay for those annual or quarterly bills which can be very important expenses. That’s how you will notice your savings getting depleted every now and then.

Can you stop these things from becoming emergencies? Yes, you certainly can, and it’s very easy and simple. You just need to add all of these bills up, divide by 12, and set aside this amount every month in another savings account. Settle those bills with the money in this account when they’re sent to ‘surprise’ you and take comfort in knowing that these will stop becoming a surprise to you!

Celebrations, Occasions, Vacations

As social animals, we have people we love, care about and celebrate festivals with, or even birthdays, and other milestones. It costs money to celebrate and in a typical month where you have too many to celebrate, you may find it difficult to strike a balance.

You can also prepare for these ‘emergencies’ in advance. List out important occasions and celebrations. Include your expected spending during festivals like the New Year, Hari Raya, Deepavali, Christmas etc. Divide by 12, and save this amount monthly in a separate savings account.

You can now celebrate with peace of mind and sense of freedom knowing that you are spending money you have prepared for, and best still, your own money (from the past, not the future)! This method is also workable for bigger ticket items such as your dream vacation.

Medical Emergencies

Accept the fact that no matter how healthy your lifestyle is, you’ll get sick eventually. Apart from sickness, it may also pay to make regular visits to the dentist or doctor, including to conduct health tests. Like everything else, these cost money.

Like the previous examples, you can apply the same method to prepare for this. The only problem is that you’re not able to accurately predict how frequently you’ll be unwell and how much that will cost. This is when you have the ‘fun’ to make an estimate. Personally, I put away RM50 a month for clinical visits. When I don’t get sick so often (which is a good thing), I get to carry forward the balance to the following year.

For bigger medical emergencies, like hospitalisation or a long treatment process, you can either save using your own money, or ‘outsource’ this to medical or personal accident insurance.

By preparing accordingly, the occurrence of financial emergencies can be reduced greatly. Moreover, by taking into account and being realistic about the spending that will eventually take place today, you’re taming your instant gratification monster by having less to fuel and feed it.

If you have put aside the set amount, can you pay for these things using a credit card? You can! Because you already have cash in your accounts available to pay for your credit card spending. So, if you want to, why not?

About the author

Kevin Neoh is a NextGen Money Coach and can be contacted at kevin@nextgenadvisors.my and www.kevinneoh.my.

March 24, 2021
Should I Make A Voluntary EPF Contribution Today?

In February 2021, the Employer’s Provident Fund (EPF) announced dividends of 5.2% for conventional savings and 4.9% for shariah accounts for 2020. Overall, I believe contributors were satisfied in view of the effects of the pandemic caused by Covid-19 which greatly affected both the local and global economy. At least their retirement fund continued to grow!

In Malaysia, EPF contribution is mandatory for both employers and employees as long as they are under full-time employment. This scheme allows workers to automatically save for their retirement from the day they start working. However, there is another category of people consisting of self-employed or business owners that might not contribute to EPF as it isn’t mandatory under business entities such as sole proprietors, partnerships or private companies (Sdn. Bhd.) and do not draw a salary from their company. Instead of drawing a salary, they get paid through director fees or dividends.

So should such income earners opt for voluntary contributions to EPF? Let’s look at this from various perspectives:

Compounding Interest Effect through Long-term Savings

In order to have a comfortable life after retirement, we have to set aside money to create a pool of funds which must adequately cater for 20 years of retirement costs. Therefore it’ll be much easier to hit this target if you start saving immediately when you begin earning an income. If you understand the power of compounding interest, you’ll know that by starting to save early, your money will be put to work for you. Therefore a self-employed person should set aside a certain percentage of income or business profits for the purpose of retirement as early as possible.

The next question is why EPF? Why can’t I save the money in the bank? Firstly, we’re currently in the low interest era and it’s likely to remain that way for the foreseeable future. EPF dividends are much higher than what banks are offering for fixed deposits, currently between 1.8% and 2.2% depending on the amount and period.

One might argue that contributors can’t withdraw the money as they wish except under certain criteria from time to time, such as the i-Sinar scheme due to the Covid-19 pandemic. The restriction on withdrawal serves its purpose to secure your future; otherwise, there’s a good chance that it will be withdrawn and spent for a variety of reasons along the years.

Discipline in regular savings is one of the key success factors in achieving your desired retirement goal. Another will be the determination of keeping those funds for your later years and not simply withdrawing it for unimportant matters. This should be your last resort of getting financial assistance, as naturally it’s much easier to spend money than save it. Furthermore, early withdrawal of the funds has a long-term impact on the accumulated funds due to the effect of compounding interest.

Tax planning

Apart from the benefits of compounding interest, as business owner should draw monthly salary from the business and contribute to EPF according to the mandatory contribution rate. In such a scenario, there’s an advantage in terms of tax savings as the amount contributed by the company is tax deductible against company profits up to 19% of the salary drawn from the company. As the business is self-owned, it’s just a matter of transferring one side of the pocket to another while enjoying tax savings simultaneously! Of course the criteria is that the company is profitable and has sufficient cash flow to do so.

Fixed Income in Your Investment Portfolio

Some might argue that instead of comparing to bank savings, why not invest in other investment tools like shares or unit trusts which can generate better returns. Provided the risk is well-managed, it could indeed be a better option than to keep savings in the bank.

To structure an investment portfolio for retirement purposes, it’s advisable to split into different asset classes for risk diversification and liquidity. Normally a conservative asset class will form part of the portfolio to provide security. In this case, you can treat EPF savings as the more secure tool that generates a fixed income of 5.5% returns on average. Other resources in the form of cash will be allocated to more aggressive tools such as unit trusts that aim for higher returns of 8%-12% for example, to enhance the overall returns of your retirement portfolio.

After much discussion on the importance and benefits of long term savings through EPF contribution, it’s advisable for the majority of people to do so. The exception will be an individual that has the capability and time to manage all their direct investments and is very disciplined in setting aside money for retirement funds, in addition to managing risk and return very well.

Otherwise do start your retirement planning as early as possible and leverage on the expertise of our country’s established retirement scheme to ensure you have a comfortable retirement. Last but not least, it’s also recommended that non-income earners such as housewives also contribute voluntarily to EPF for their future security with support from their spouse.

About the author

Dennis Chin is a financial advisor, approved and licensed by Bank Negara Malaysia and the Securities Commission Malaysia. He can be contacted at dennischin@harveston.com.my

March 22, 2021
How to Calculate The Internal Rate of Return for Property Investments

Let’s use the following example of a 1,500 sq ft fully furnished, two-bedroom, three-bathroom apartment in Mont Kiara valued at RM1 million, with rental at RM4,000 per month and a RM500 monthly management fee. We also assume that for 5 years, the property is perpetually rented. The rental yield is [(4000-500) x 12]/1,000,000 or 4.2%.

While this is simple enough math, it doesn’t take into account appreciating (or depreciating!) property. Nor does it take into account the upfront costs you probably paid to renovate the home for it to be competitively rented out. And what about those annual taxes? Or that one-month agent fee you paid?

Going over the variables for this exercise, we get:

(A) Initial outlay – including legal fees, down payment and booking fees = -RM150,000

(B) Monthly loan payments = -RM3,800

(C) Upfront renovation works = -RM50,000

(D) Monthly management fee = -RM500

(E) Monthly rental income = RM4000

(F) Taxes and property insurance = -RM1000

(G) Hypothetical net selling price of the property in year 5, minus RPGT and marketing/selling costs (eg. agency and lawyer fees) = RM1,100,000

(H) Hypothetical remainder of loan outstanding on the property in year 5 = RM790,000

Step 1: Calculate net inflow or outflow for each year

Let’s put the values below in Column B, next to the corresponding years in Column A.

Year 1 = A + (B x 12) + C + (D x 12) + (E x 11) + F (don’t forget the one month agency fee!)

Year 2 = (B x 12) + (D x 12) + (E x 12) + F

Year 3 = (B x 12) + (D x 12) + (E x 12) + F

Year 4 = (B x 12) + (D x 12) + (E x 12) + F

Year 5 = (B x 12) + (D x 12) + (E x 12) + F + G – H

Step 2: Input the formula for IRR in Excel

In cell B6, input =IRR(B1:B5) to select the values of the cash movements in Step 1 above.

This should result in an IRR of 9.08%.

Summary

In short, the internal rate of return is an annualised investment return which is directly comparable to other asset class returns. For example, if a share at the end of one year gives you 14%, inclusive of capital gains of the stock as well as dividends, then this number becomes immediately comparable to the IRR of the property.

The trick here is to be realistic and be honest with yourself. After all, there’s no point cheating in comforting yourself that these property investments are “paying for themselves”. Using ratios and numbers such as IRR enables astute property investors to make logical decisions on what represents a good or not-so-good investment decision.

Click here to read the full article about how to spot property investment opportunities in Malaysia.

About the author

Rozanna Rashid is a Licensed Financial Planner (CFP, IFP) and holds an MSc in Real Estate Economics & Finance from the London School of Economics & Political Science. Her background is in corporate banking and Islamic finance and she can be contacted at rozanna@alpine-advisory.com.

March 20, 2021
The Most Common Financial Planning Myths

Financial planning has been defined as a process of developing strategies to help people manage their financial affairs to meet life goals. However, many people tend to have misconceptions that can be described as financial planning myths.

“The best time to invest was yesterday. The next best time is now.”

Yesterday has passed, so now’s the time for you to plan for your future, which involves learning about money and financial planning. If you master your finances well, then you’ll likely live a great life in the future because delayed gratification helps you to reach your life goals faster.

What this means for you is to overcome the most common financial planning myths that I’ll be sharing with you in this article.

1. Financial Planning is Only for the Wealthy

It doesn’t matter whether you earn RM2,000 a month or RM20,000 a month. As long as your income is used to pay for expenses, you need to have a financial plan regardless of whether it’s a simple or comprehensive plan. You need to calculate your net worth statement, cash flow statement and well as other relevant financial ratios.

Whether you are driving a luxury car or economical car, you’ll still need to send your car for regular servicing – the only difference is the cost of servicing. Similarly, regardless of income levels, all of us still need to manage our own daily expenses, loan expenses and other allocation into savings or investments.

2. I’m Too Young for Financial Planning

Financial planning is meant for everyone regardless of age. If you are a child or teenager, it would be great if your parents teach you the importance of savings and growing your money that you received from red or green packets during festive seasons and other celebrations. Parents with good financial beliefs should plan for their children by starting a high interest savings or investment account for them in order to reap the benefits of the long-term returns.

If you’re a working adult, you probably should have a financial plan in place to set aside and build an emergency fund, start insurance planning, retirement planning, travelling fund and or savings for your first house or car, and / or a wedding.

If you’re a new parent, you need to plan for your children’s education, on top of your retirement and insurance planning. Some may probably need to save and invest so that he or she can accumulate enough capital to start a dream business. It’s at this stage that you may want to consider estate planning.

If you’re a retiree, you may review and plan the expenses required for your desired lifestyle, which could include travelling goals, or simply your medical expenses.

3. I Will Start Financial Planning when I Earn More

Another common answer is, “I don’t have much income to plan financially and I will only start when I earn more”. Let me illustrate why this is a bad idea through this chart blow:

These are two individuals, Mr. Early and Mr. Late. Assuming, both portfolios are growing with an annual compounded rate of 10% over the period of their investment horizon. Mr. Early who has learned the power of compounding from his dad and through reading investment books started saving regularly at age 25 with RM500 per month till age 55.

However, Mr. Late who believed that he should spend first and save later when he started working only realized the power of compounding and saving regularly after attended a wealth seminar recently. He started saving regularly at age 35 (10 years later than Mr. Early) with RM1,000 per month until age 55.

When both reach age 55, Mr.Early would have accumulated RM1.13 million and Mr. Late with RM759,000 (even double the amount of Mr. Early monthly savings). The difference is around RM371,000 just by delaying it for another 10 years. Hence, do spend some time to learn and establish what your beliefs about money and financial planning are. Otherwise, it could have serious consequences on your financial goals or life goals.

“It’s not your salary that makes you rich, it’s your spending habit” – Charles A. Jaffe.

What are you waiting for in your financial planning journey?

About the Author

Goh Chee Yong is a Licensed Financial Planner, and can be contacted at cygoh@imaxfinancial.com.my.

March 19, 2021
How to Set Financial Goals for Your Future
Much has been said and written about the sorry state general of financial literacy among people, both local and globally. According to financial literacy platform Multiply, almost 70% of Malaysians are in need of financial literacy support.

“Financial planning” seems to be a popular catchphrase in recent years. The 7th of October is even recognised as “World Financial Planning Day”, which began four years ago. The purpose? To raise awareness about the importance of financial planning.

If I used the term financial planning with my grandparents, they would say “Don’t worry so much, just work hard and be honest in your trade”. This shows how the concept of Financial Planning is fairly modern, with such an ideology being so foreign back in those days. Chances are, if you asked someone who is in their 60s or 70s today what financial planning means, there’s a high chance they’ll say it’s having insurance!

However, financial planning is the process of developing strategies to help people manage their financial affairs to meet life goals. What constitutes a good financial plan? First and foremost, it involves taking stock of your assets, liabilities, investments, income, expenses and cash flow. The next part is important because it involves knowing the right strategies in order to achieve future goals. It also helps to break down goals according to priority and affordability. It then requires constant monitoring because we know circumstances in life will change – for both good or bad.

Financial planning is clearly not as simple as signing up for a product. It’s a commitment to yourself and your family to ensure that your financial goals are achieved. In my observation and dealings with clients, I have found that the challenges in developing and sticking to a financial plan are summed up below (the list is not exhaustive):
- Lack of priority – due to busyness at work and family commitments. The fear of the unknown future can be very daunting and it is easy to sweep this aside
- Rising consumerism – shopping and spending is extremely easy. You can purchase literally anything in the world online and get it delivered to your doorstep. If left unchecked, would there be funds in the event of an emergency, let alone savings for the future?
- Escalating prices of real estate – one of the social issues that the government is trying to tackle is the issue of affordable housing
- Low interest rates – At the point of writing, the Overnight Policy Rate (OPR) rate is 1.75% which translates to Bank fixed deposits of 1.6% to 1.9% per annum
- Salary vs inflation – not on par with rising cost of living
All these seem to indicate that the younger generation is already at a disadvantage in achieving the same levels of success compared to their parents. For example, if your parents could afford to send you overseas when you were in university, can you confidently say you will be able to do the same for your children today?

Having a financial plan is akin to being prepared for battle. You will know your limitations, ability to optimise your resources and your odds of winning.

In the case of an investment portfolio, the more you spend time monitoring, the more invested you will be. For example, if you exercise daily, you’ll be much more conscious of your lifestyle, choice of food and calorie intake. The same can be said for a financial plan when you monitor it on a regular basis, which will lead to you becoming wired to make more informed financial decisions.

Too much focus on any one area such as savings, investments, or insurance, may adversely affect the balance of your financial plan. The topic of investments alone is so vast, with plenty of choices available today, and is often confusing for consumers. Each platform has its pros and cons and it’s easy to get distracted by the whole process and only see things from that one perspective. Having a macro view is important and most consumers are not trained to do that.

Let me give you an example. It’s highly possible to have false confidence knowing you invested in a portfolio that is performing at 15% per annum. However, if the amount invested was RM10,000, and even IF this portfolio could consistently perform for the next 10 years at 15%, the future value is only RM45,000. In the larger scheme of things, is that total of RM45,000 a meaningful solution in terms of the end goal to fund a child’s tertiary education and/or your retirement? Investment should be a means to an end, not the end in itself. Successful investment requires time, strategy and consistent positive returns to be favourable.

There’s also the danger of neglecting risk management. An employee or an entrepreneur’s greatest asset is their ability to earn and also their potential future earnings. This asset can be severely affected due to a major health crisis. Have you considered income replacement in your financial plan? Most companies would have decent employment benefits that would cover you in the event of death and hospitalisation. However what happens if an employee is unable to contribute 100% to his/her job due to a health condition? Will your employer be happy to retain such an individual?

In summary:
- Work hard and smart in your trade
- Manage potential risks that could happen in your working years
- Look for opportunities to invest (in products/services registered with the Securities Commission Malaysia)
- Monitor your financial plan and goals diligently
- Seek out a Licensed Financial Planner to get a second opinion on your finances
- Develop an estate plan as an act of love to your loved ones/charities
With proper monitoring and guidance, you can be on the right track to achieve your financial goals.

About the Author

Kam Teik Guan is a Licensed Financial Planner, and can be contacted at kam.teik.guan@ipp.com.my.
March 17, 2021
Value Investing in the Pandemic Economy

Most investors use either one of two primary strategies when it comes to investing – value investing or growth investing. Interestingly, the term ‘value investing’ is often used but not all investors understand the meaning of ‘value investing’.

What is value investing all about, and what are value funds and the benefits of investing in a ‘value fund’? When the Covid-19 pandemic spread globally and became the world’s largest health crisis, it stirred things up completely and left us with the question “Do value investing strategies remain relevant in these times?”

What Is Value Investing?

Value investing is a strategy that focuses on trading at a share price that’s considered to be a bargain for businesses with good fundamentals. The strategy involves selecting stocks that are undervalued compared to the industry average or their peers. The theory behind this approach is that the stocks of good companies will bounce back in time, if or when their true value is recognised by other investors.

A stock price may be undervalued because of an overreaction to market news, such as disappointing earnings, negative publicity or legal problems, all of which may raise doubts about the company’s long-term prospects. To determine the real value, value investors usually ignore the stock price and look at the entire company. They focus on the company’s fundamentals such as sales data, financial reports, holdings, real estate, patents, intellectual property, research and development, and many other factors. Value investing aims to exploit the irrational short-term behaviour of emotional investors.

What Is a Value Fund?

A value fund primarily invests in value stocks. Value fund managers will research and analyse a company’s fundamentals to determine if its stock is “good value” and should be purchased. However, it’s commonly believed that investors decide to buy into a fund based on the fund’s net asset value (NAV), which is incorrect. Investors should focus on macro-trends for the sectors in which the fund has invested.

Value investing is a long-term strategy, as it invests in companies with a high likelihood of generating a higher income to produce a sustainable cash flow. Thus, in a value fund, even if the stocks do not appreciate in value, the investor can benefit from dividends, if there’s high upside potential.

Market Review

The COVID-19 pandemic, followed by the movement control order (MCO) and a series of conditional movement control orders (CMCOs), disrupted many industries. A significant number of companies suffered as both their top line and their bottom line were affected. As people were unable to travel and were quarantined at home, business revenues dropped precipitously.

A lack of cash flow impacted the growth and performance of many firms, which was reflected in stock prices. Many investors, especially retail investors, resorted to panic selling which led to the market plummeting much faster compared to previous crises.

Sectors like energy and banking, plus cyclical, such as automakers, aerospace and defence firms, insurance companies and building material suppliers, all suffered, as they’re sensitive to economic cycles. Investors are currently weighed down by concerns that COVID-19 would persist, unemployment would remain high, interest rates and inflation would stay low, and dividends would not recover.

As a result, they shortened their time horizons. They piled into secular winners and avoided cyclicals. Fear and uncertainty also meant that investors favoured well‑understood growth stories during the recovery rally without considering valuations. Growth stocks, supercharged by low interest rates, digitisation, working from home and other pandemic-related trends, were continuously bought up which drove the market higher.

However, while the circumstances clouding the market were dark, falling prices created opportunities for fund managers to buy undervalued stocks. As mentioned earlier, a value investing strategy aims to benefit from the irrational behaviour of emotional investors. This is because fear and greed remain ever present and frequently lead to poor investment decisions based on perception and emotion rather than reality. For example, on March 15, 2020, the FBM KLCI slumped to its lowest level since December 2011, due to the second wave of Covid-19.

2021 Economic Recovery – The Benefits of a Value Investing Strategy

Growth should accelerate as the vaccine becomes widely available, allowing consumer, work, leisure and travel habits to return towards more sustainable levels. If the vaccination programme is effective, it will help drive economic recovery, which should favour the cyclical parts of the market. Furthermore, the expansionary government policy may see unemployment drop sharply and the bull market may keep running, with the COVID-19 losers likely to be the first to benefit.

China is a great example of how a recovery scenario could potentially play out globally. Their aggressive efforts to control the Covid-19 pandemic in the early days of the crisis were widely scrutinised, but the country’s heavy-handed approach paved the way for it to be largely Covid-free by the second half of last year. Consumer spending, car sales, and economic growth have all bounced back strongly from the depths of the pandemic back in March.

Certain sectors, such as airlines, energy, banking and other value sectors, may not recover in 2021, as the demand for their goods and services may not pick up until 2022. However, the stock market is forward looking and pricing in an anticipated recovery. These sectors may do better in 2021 than the economies in their respective states. Moreover, comparisons of corporate earnings could become more important in 2021. Many value cyclicals will have an easier time beating their dismal 2020 figures, unlike growth companies, which have a much higher bar for impressing investors.

The Bottom Line

The road to a post-COVID-19 ‘new normal’ will not be smooth. Investing during uncertain times can make an investor anxious and fearful, but even in good times, it can also be challenging. Investing successfully depends on being able to control and manage the risks without skipping the possible returns. This pandemic is having a significant impact on both value and growth stocks in the short term and long term. The most popular value investing strategy is diversification, which is designed to create a high safety margin.

About the author

Joe Tiong is a certified financial planner and she can be contacted at joe.tiong@uobkayhian.com.

March 10, 2021
How A Credit Card Works in Malaysia
2020 was a challenging year for many, but undoubtedly, it also sped up the transformation of people’s spending habits, pushing all of us towards online channels. Try to recall your last online shopping experience. How did you pay? It most likely would’ve been through online banking, e-wallet or credit card. Many of us choose to pay using credit cards because of a particular bank’s promotion or to collect points.

In the mid-1970s, credit cards were first introduced in Malaysia. Since then, it has become one of the most common payment methods and the main source of short-term borrowing. With credit cards, we can buy the item now but pay for it later when it’s due. Today, with the government’s cashless society initiatives, credit cards are playing their role everywhere, and aren’t limited to just physical payments. It can be used for monthly auto-recurring bills, reloading e-wallets, signing up for an easy payment plan (EPP) and more.

It’s a reality that credit cards are a major payment method in our daily lives. However, to play well in the “game of credit cards”, we need to know the rules to abide by first.

1. What’s The Entry Fee?

There are two kinds of fees involved here.

a) Service Tax

Effective from 1 September 2018, all cardholders are required to pay an annual service tax of RM25 for each active credit card (principal card and a supplementary card will be charged separately). This fee is unavoidable but some banks do offer rebates for this.

b) Annual Fee

From a personal finance perspective, you should only opt for a zero annual fee card! Unless you have strong and valid reasons, you should avoid a card that charges you hundreds or thousands of ringgit in annual fees.

2. What You Need to Know?

To avoid falling into traps, it’s better to know some jargon first.

a) Credit Limit

Treat it like a pre-agreed loan amount. This is the maximum amount that the bank grants to us for our spending. To determine the credit limit, banks usually look at two factors – our income and credit history. If we spend more than our limit (ie. breaking the rules of the game), be prepared to get a fine!

b) Minimum Payment

Ideally, you should endeavour to pay your outstanding balance in full. However, at the very least, you’re required to pay the minimum amount, which is 5% of the outstanding balance subject to a minimum of RM50. However, please take note for instalment payments like easy payment plans (EPP), the full instalment amount must be paid. If you can’t pay the minimum payment before the due date, be prepared to get a fine as well.

c) Interest-Free Period

This is the tricky part. We do enjoy an interest-free period of 20 days from the statement date provided all outstanding balance is fully paid. The last day of this interest-free period is usually referred to as the due date. Many people will have a wrong perception that they will always enjoy the interest-free feature for all new purchases, even when there’s an outstanding balance on their cards. However, this isn’t the case. If you have any outstanding balance on your credit card, the interest-free period won’t apply to the outstanding balance as well as any new purchase.

For example, if someone has an outstanding due balance of RM1,000, and he/she makes another new purchase of RM1,000 with the same credit card, the finance charge will be calculated based on the RM2,000 balance (outstanding and new purchase) instead of the previous balance due of RM1,000.

3. Are There Penalties?

If you can’t play the game well, you might need to pay a penalty.

Most people know that credit cards charge high-interest rates. However, between interest rate and convenience, people tend to opt for convenience first. A swipe of a card will always be the top choice compared to a loan application, which can take a few weeks to be approved!

a) Late Charges

Everyone knows credit cards work under the buy-now-pay-later mechanism. However, if we don’t make the minimum payment before the bill’s due date, a late payment will be charged. Usually, the amount will be 1% of your outstanding balance (subject to a minimum of RM10, or up to a maximum of RM100).

b) Finance Charge

If there is an outstanding balance that remains unpaid on the due date, a finance charge will be applied (usually people refer to it as interest). Bank Negara Malaysia implements a tiered interest rate system for credit cards, ranging between 15% to 18% depending on your repayment track record.

c) Overlimit Fee

If you spend more than your approved limit, an over limit fee will be charged. It varies across different banks, from RM25 to RM50 per month.

These are some of the important things you must know before you apply for or start using a credit card. It’s important to take note because misusing credit cards can lead to financial ruin. Shifting your payment pattern to cashless can be rewarding. However, it can easily lead to overspending as well. According to the Department of Insolvency, Malaysia recorded 84,805 cases of bankruptcy between 2015 and 2019, with around 10% attributed to credit card debt!

For credit card newbies, I have five important suggestions for you:
1. Apply for only one card and get used to the full credit card payment cycle before applying for a second (if required).
2. Limit your monthly credit card usage initially, then you can consider increasing later once you have proven to yourself that you can manage this well.
3. If you can’t pay the full amount in cash now, don’t even think of making another purchase with your credit card.
4. Check your credit card statement every month to review your “swiping pattern” and ensure there are no fraud / unauthorised transactions.
5. Never pay the minimum amount for the month; full payment is a must by each due date.
Financial literacy is not just about knowing about financial matters. Acquiring and consuming knowledge is easy in the internet era, but behaviour and habits are what counts. A credit card is a good financial tool if you use it wisely. Be responsible for your personal finance today as financial planning starts from small baby steps. If you need a professional to assist you along the journey, consider engaging a licensed financial planner to keep you on the straight and narrow path towards financial freedom.

About the author

Ocean Pon is a Licensed Financial Planner and can be contacted at oceanpon@finwealth.com.my
March 5, 2021
The Importance Of Building An Emergency Fund
As we start this new year, there’s a lot of hope that 2021 will be a better year than 2020, and that our lives will resume some form of normalcy since the start of the Covid-19 pandemic. We’d all like to go around our daily lives in the way we were able to previously.

Unfortunately, 2021 has started to unfold in a similar pattern to 2020, but we should remain optimistic and hope for the best. As with any new year, it’s a great time to set goals and have a fresh start. I believe many of us will have new year resolutions this season, some of which will revolve around finances.

For many people, financial freedom, being debt free or cash rich is often on their goals or resolution list, but how many are able to achieve it? There’s a popular adage often attributed to Benjamin Franklin, the father of time management ” Failing to plan is planning to fail.” Many of us draft a new year resolution list but without proper planning, and setting goals, timeframe, and deadlines to meet, one will never achieve their plan.

When Malaysia went into our first Movement Control Order (MCO) in March 2020, many Malaysians found themselves in financial difficulty as they were not prepared to face salary cuts, reduced working hours or even losing their jobs due to the economic shutdown. News has also been circulating of those who just managed to restart their businesses or get new jobs going back to square one as a result of MCO 2.0 due to the rising Covid-19 daily positive cases, currently at the four digit mark.

Due to the uncertainty of such times, it’s important to reflect on where you are and where you want to be, as life altering events usually result in people taking a hard look at themselves to reform and transform. No doubt the pandemic has impacted many people in more ways than one, with saving habits being one of them. If you’ve planned your financials appropriately and have a sufficient emergency fund in place, you’d at least be able to support yourself and be less stressed in such times. One of the things that Covid-19 has taught us besides resilience and adaptability, is the importance of proper financial planning and having sufficient savings.

The purpose of an emergency fund is to cushion the blow should unexpected events occur, such as medical bills, retrenchment, business closure, home emergencies home or car repairs. You’ll have peace of mind and less money worries if you know you have sufficient funds to tide you through difficult times. In addition, you’ll also have more confidence to save money for other financial goals such as retirement or your children’s education if you have an emergency fund in the first place.

How Much is Sufficient for an Emergency Fund?

Your emergency fund should cover at least 3-6 months’ worth of essential expenses. Of course, you can save for more than six months; some people have up to 12 months of savings or more! It depends on:
- Family size – are you single, a breadwinner, or in a dual-earner family i.e. you or your husband/wife works?
- How closely your job is tied to economic changes
- Financial responsibility
Essential expenses are bills that you can’t stop paying such as food, utilities, household essentials, rental or mortgage repayment, car repayment, insurance and medication. Gym passes, entertainment expenses, or Starbucks coffee aren’t essential expenses.

Six months of fixed expenses is the guideline, but it’s acceptable to save more but be warned that keeping excessive funds in your bank account only is also not advisable as the money doesn’t generate additional returns for you and will be slowly eroded by inflation.

How to Start an Emergency Fund?

As with all other things in life, start with a small realistic goal. Determine an amount that you’re comfortable to set aside every month, for e.g. RM200. It doesn’t matter if you start small as long as it’s realistic and you can move forward. Once you have accomplished this, set a new savings goal that will require more effort e.g. RM500, slowly add to it until you have accumulated one month’s worth of expenses. Your ultimate goal will be to reach 3-6 months of your fixed expenses.

Where Should I Keep My Emergency Fund?

An emergency fund is all about keeping it safe. Hence, there’s no specific investment tool to keep your emergency fund, as long as it is safe, liquid and easy to access. Most people will prefer to save in a savings account or fixed deposit (FD).

The reason for putting these funds into a safe investment tool is because if the money is in high-risk investments, there’s a risk that you could lose all the money. For example, saving an emergency fund of RM15,000 earning 2% interest in fixed deposits gives you RM300. If you were to invest in the stock market and can generate 8% annually, that’s RM1,200. While an extra RM900 may be significant to you, it isn’t guaranteed as you could lose all the capital you invested in the stock market if market conditions are unfavourable.

Hence, don’t be greedy and just leave your emergency fund in a fixed deposit or savings account as the goal is liquidity, not high returns.

Life can be unpredictable so it’s important to put aside a small amount of cash each month to cushion the blow of emergencies in difficult times. Many people strive for high-risk investments where they take on unnecessary risk to earn more money but are left with no basic savings. For those who don’t have this habit, start building your emergency fund from now. Learn from the past and don’t procrastinate. Once sufficient emergency funds are set up, it’s time to aim for your next financial goal, which can be for the short, medium or long term, depending on your life goals and/or values.

About the author

Yit Wei Yeing is a registered financial planner. She can be contacted at wyyit@genexus.com.my.
March 3, 2021
MRTA vs MLTA: Which Mortgage Life Insurance to Pick

Most millennials are taught from a young age that owning a property, especially their own home, should be one of their life goals.

This leads to them saving up diligently from the day they enter the workforce with the dream of owning a property someday, either for their own stay or investment purposes.

However, you should remember that getting the keys to your own property is not an endgame.

Having signed the mortgage loan agreement, most will assume the best and expect to live until the loan is fully paid off.

But in the unfortunate event that you are no longer around to pay off the loan, it is important to ensure that you leave behind an “ASSET” and not a “DEBT” for your loved ones. On top of that, you have to distinguish what is the difference between MRTA vs MLTA.

Why Should I Have Mortgage Insurance?

These days, most mortgage tenures range from 30 to 35 years.

This is a very long time and should unforeseen circumstances like pre-mature death, disability or serious illnesses occur, your joint-borrower or next of kin (spouse, parents, children etc.) will need to continue servicing this debt until it is fully repaid. In other words, your debt has become their liability.

Therefore, it’s important to have mortgage insurance to protect against these risks even if the property is meant for investment purposes.

Some may argue that if the property is bought as an investment, it’s not necessary to have mortgage insurance as the property can be sold should the unforeseen happen. However, you must remember that the property market is cyclical in nature.

What if tragedy strikes during a crisis or market downturn? Your next of kin may need to sell the property at distressed prices and suffer financial losses from the sale just to pay off your outstanding loan.

So in order to safeguard against these risks, it is very important to have mortgage insurance and also a will to smoothen the process for distribution of your estate.

The two most common mortgage insurances are MLTA (Mortgage Level Term Assurance) and MRTA (Mortgage Reducing Term Assurance).

The Difference between MLTA and MRTA

Generally, an MLTA offers not only protection for the amount of outstanding loan, but also functions as savings since the amount insured will be consistent throughout the duration of the loan.

If nothing happens at the end of the loan tenure, you will receive back the total premium that was paid over the years. On the other hand, an MRTA covers the money owed to the bank from the loan.

The coverage decreases over time and if nothing happens at the end of the loan tenure, you won’t get any money back.

As for the protection coverage, both MLTA and MRTA offer basic life coverage (Death or Total Permanent Disability) with the option to include critical illness coverage depending on your needs.

For MLTA, you can appoint anyone as your beneficiary whereas for MRTA, the sole beneficiary is the bank.

In addition, MLTA is also transferable which means you can sell off a property and replace it with another property under the same MLTA.

Even if you refinance your loan, you do not need to replace it with a new MLTA. For MRTA, it is non-transferable as it is tied to your loan with the bank.

In terms of cost, an MRTA is more affordable. The premium for MRTA is paid as a lump sum and can usually be bundled into the mortgage loan.

As for MLTA, you can choose to pay your premiums on a monthly, quarterly, semi-annual, or annual basis.

So What Should I Do?

In most cases, the banks will typically offer you mortgage insurance (MRTA) together with the loan.

However, it is not compulsory for you to take up this mortgage insurance from the bank so don’t feel pressured into getting it.

Instead, seek consultation with your financial planner to discuss which option is best suited for you.

About the author

Billy Teoh (RFP) is a licenced financial planner, and can be contacted at billy.teoh@ipp.com.my.

March 1, 2021