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Kolej Profesional MARA Bandar MelakaIslamic Wealth Management

Jan-Jun 2012

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TOPIC 1 : OVERVIEW OF WEALTH MANAGEMENT

1.1 Introduction of Wealth Management

Introduction: Wealth management and financial planning are an expanding segmentin the financial market. It is gaining recognition as a professional occupation.Increasing demands in recent years, particularly in the area of retirement planning,have been prompted by various factors as follows:

1. The deregulation of financial market2. The opening of new investment opportunities3. Increased complexity in taxation matters4.An ageing population resulting in higher dependency rate5. Government encouraging financial self reliance6. Promotion of risk sharing portfolio investment: market linked investment

and floatation of public companies shares7. Increased trend towards stock market investing8. Increased globalization of personal wealth creation

Evolution of WM in Malaysia


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The Wealth Cycle

The WM Service Offering in Malaysia


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The need to have licenses to conduct sales of some instruments has made itnecessary for the growth of this profession. A person is regarded as providingfinancial services if they are doing the following:

1. Give advice on financial products2. Deal in financial products3. Make a market in the financial market4. Operate a registered scheme5. Provide custodial service

Wealth management and personal financing planning are increasingly viewed asimportant as not many people save sufficient funds to meet their retirementrequirements. This is made worse as marketing activities in the market, oftenencourage people to spend more and conversely, to save less.

Wealth management and financial planning have attracted bigger attention recentlydue to:

1. More people are expected to retire, especially in the older groups and due toageing population

2. Increase in longevity3. Introduction of compulsory saving4.A Greater range of financial assets to be chosen from

In the background, is the process of the government and employers transferring the

burden of taking care the old-aged staff to the employees themselves.

Developments that have quickened the pace of growth and progress of wealthmanagement & financing planning:

1. Increased market cycle higher volatility2. Higher risks accompanied by higher returns3. Benefits of diversification - better returns arising from spreading investments

over asset classes4. Growing investors quest for greater transparency5. Rapid changes in legislations and economic scenarios that affect a persons

tax and pension

1.2 Importance of Wealth Management vs Financial PlanningWealth management vs Financing Planning

Definition: Generally, wealth management and financial planning areconceptually the same with the former being described as an advanced typeof the latter.

The important of wealth management and financial planning are:


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1. Minimize tax2.Acquire reasonable returns on investment3.Achieve financial independence on retirement4. Provide financial security for family5.

Balancing current lifestyle with future lifestyle1.3 Role of Financial Planners

Financial planners advise / help clients as follows:

1. Make informed decisions about money2. Protect income and assets3. Use money optimally4. Understand risk5. Develop a sound financial plan

1.4 Six (6) Steps Towards Creating a Financial Plan1. Gather qualitative and quantitative data2. Identify clients goals3.Analyse clients financial position and identify financial problems4. Prepare written recommendations statement of advice (SOA)5. Implement the agreed-upon plan6. Revise, reuse and maintain financial plan.

All these steps will be covered in greater details at a later part of this module (topic

13).


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TOPIC 2: WEALTH MANAGEMENT UNDER SHARIAH

2.1 Source

Islamic worldview of wealth management is derived from the Quran and

Sunnah / Hadith. The need for managing wealth and planning for it, is amplydemonstrated in Surah Yusof:47-49. The verses underscore the need forovercoming future uncertainty and hardships by having proper planning.Within the context of planning for avoidance of hardships and /or planning forcontinuous prosperity, the general view held that this task is a form of ibadah(worship) to God. It involves putting in efforts before reaping and enjoyingthe fruits of the efforts. In other words, one needs to sacrifice currentcomfort in return or greater benefits later. Similar, one has to spend wiselyand save for a better future.

Under shariah, wealth owned by a person is a trust from the God that mustbe managed wisely by him. Wealth is valued highly so much so that it isregarded as the adornment of life (Al Kahf:46). A hadith reflects theimportance of wealth by narrating the following:

It is better to leave behind your heirs rich rather than poor begging from others

In another hadith, Luqman Al-Hakim advised his sons to strive hard to acquirewealth as without it, he would face difficulties insofar as his belief, intellectualstability and dignity / self esteemed is concerned. It implies that Muslims

are encouraged to seek wealth and to be engaged in wealth creationactivities. Islam demands that wealth to be spend wisely and prudently.Proper wealth management is, as such, obligatory for every Muslim. Wealthis a critical means to achieve success (Al-Falah) i.e. both good life in theworld and life in paradise in the Hereafter.

The importance and the benefit of proper spending of ones wealth arereflected in the rewards being promised by the God i.e. in the form of goodlife in this world and the avoidance of life in hell. As such, spending oneswealth wisely has a bearing on the quality of life of a Muslim.

All of the above leads to the conclusion that Muslims should see theimportance of proper wealth and financial planning.


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2.2 Function of an Islamic Financial Planner

The basic function of a financial planner is providing financial plan to meet theclients financial goals. The plan should include strategies in managingfinancial affairs to meet pre-determined goals.

For an Islamic financial planner, the function is the same as above except thatthe goals are guided by the shariah and the methods being must be shariah-compliant.

The basic on which Islamic financial planning is built is in the shariah itself. Amajor activity in any financial planning is wealth accumulation. Shariahdictates how wealth is to be accumulated. In his pursuit of wealth, he shouldobserved shariah all the time. The manner in which wealth is to be acquiredhas to be shariah compliant. As such, there must not be the presence ofelements prohibited in Islam such as riba, maisir and gharar. The financialplan developed by an Islamic financial planner should avoid items that arewholly rejected by the shariah such as interest, brewery, pork, pornographyand tobacco.

The task of incorporating wholly shariah-compliant products in the plan is notthe difficult as there are more shariah-compliant products available in themarket.

2.3 Zakat

One of the most important principles of Islam is that all things belong to God,and that wealth is therefore held by human beings in trust.

The word Zakat means both 'purification' and 'growth'. Our possessions arepurified by setting aside a proportion for those in need, and, like the pruningof plants, this cutting back balances and encourages new growth.

Zakat is the amount of money that every adult, mentally stable, free, andfinancially able Muslim, male and female, has to pay to support specific

categories people.

Arising from the need to observe shariah, an element necessary to befactored in the Islamic financial planning is the requirement to pay zakat.This wealth purification method is uniquely Islamic. No such requirementexists in the conventional financial planning.


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2.4 Protection from Harm via Takaful

In protecting self and family against risk or loss of income, or against fire ofcontracts etc., an Islamic financial planning will encourage the clients tomitigate the adverse impact via the purchse of takaful products. As theunderlying contracts of all takaful products are shariah-compliant, the use oftakaful products will ensure that clients needs are fulfilled.

Under the conventional financial planning, insurance products are used tomitigate the risks. Life insurance is not acceptable under Islamic financialplanning as it has elements of riba, gambling and gharar which are deemedharam under the shariah.

2.5 Time Horizon

Whilst the scope of the conventional financial planning covers the period of

up to the demise of the client, the Islamic financial planning goes beyondthat. It impacts life in the Hereafter.

2.6 Wealth Distribution

Under conventional wealth management, the wealth owner can dictate thebeneficiary of his wealth upon his death. He is assumed to have absoluteownership of the wealth. As under the shariah, the wealth owner is assumedto hold the wealth as a trustee, he is required to abide by the shariah inmatters involving wealth distribution. As such, the Islamic financial plannershould familiarize himself with the Islamic distribution concepts such as faraid

(inheritance), wasiyah (will), hibah (gift) and waqf (charitable endowment).

Conventional financial planning does not incorporate the requirement toobserve the shariah compliant distribution method. The conventionalfinancial planning objectives do not have consideration for socio-economic

justice.

2.7 Ultimate Objective Al Falah

The ultimate objective of Islamic financial planning is the quest for Al-Falah to be successful in both worlds i.e. this world and Hereafter. Such as,

embedded in the Islamic financial planning those important elementsnecessary to create a shariah compliant plan i.e. incorporation of zakatpayments, takaful and avoidance of all non-halal elements from the plan.

In conclusion, Islamic financial planning is not only unique but also morecomprehensive than that of the conventional financial planning. The Islamicversion has its core steeply embedded in shariah in all its elements i.e.creation of wealth, accumulation, purification, protection and distribution.


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2.8 Islamic Financial Planning in Malaysia

Islamic Financial Planner (IFP) is the authorized executives that serve theretail segment of the Islamic financial market. The continued innovation ofIslamic financial products and the growing demands of discerning Islamicretail clientele call for higher standard of competency and ethical practice offinancial planning professionals. The introduction of ILP is to furtherstrengthen Malaysias leadership in Islamic finance.

Both Bank Negara Malaysia (BNM) and Securities Commissions (SC) recognizeIFP. IFP is expected to be competent financial planner capable of meetingthe financial planning needs of the consumer in conformity with ShariahPrinciples. He should be fully equipped with all the necessary knowledge ofIslamic Financial Advisory for the retail market.

IFP is expected to function as follows:

1. Guide the clients through the financial process.2.Advise clients on how they can achieve their financial targets.3. Introduce and monitor financial plan for the clients.4. Have clear appreciation of Islamic financial planning.To qualify for IFP, the person must possess SPM plus relevant working

experience in the financial services industry and undergo a 6 modulesexam-based certification programme:

Module 1: Fundamentals of Islamic Financial Planning

The objective of this course is to provide an overview of the IFP program andbasic knowledge of being an Islamic financial planner.

Module 2: Risk Management and Takaful Planning

The objective of this course is to provide knowledge on risk management fromconventional and Islamic perspective and its relation to Takaful, and to explainand familiarize with Takaful and its products and services.

Module 3: Islamic Investment Planning

The objective of this course is to equip candidates with knowledge and skills oninvestment planning focusing on Shariah compliant investment and contract


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Module 4: Zakat and Tax Planning

The objective of this course is to equip candidates with knowledge on Zakat andTax planning with focus on Individual taxation.

Module 5: Islamic Estate, Retirement and Waqf Planning

The objective of this course is to equip candidates with knowledge of Estate andRetirement planning from conventional and Islamic perspectives and the planningtools with special focus on Waqf (Philanthropy).

Module 6: Financial Plan Construction and Professional Responsibilities

The objective of this course is to equip candidates with adequate knowledge of asystematic process to gather, analyze and synthesize information from clients inorder to develop and implement a comprehensive Islamic financial plan.

IFP is similar to certified Financial Planner (CFP) awarded by financialPlanning Association of Malaysia (FPAM) with the exception that ILP is well-versed in Islamic financial planning.


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TOPIC 3: INVESTMENT

Investment is defined as current commitment of money or other resources inexpectation of reaping future benefits. In essence, a person sacrifices something ofvalue today expecting to benefit from that sacrifice later.

Alternatively, he is saving more today in expectation that he could accumulatesufficient funds to purchase / invest in those things that he could not otherwisepurchase / invest.

3.1 Consideration

Some of the more critical considerations in making an investment decision areas follows:

1. ObjectiveThe objective that a person has with regard to his investment has animportant bearing on the type of investment chosen by him. If his mainobjective is producing a constant income annually, then the investmentproduct best suited for him is an annuity and not the high-risk stocks andshares even though they yield higher returns.

2. Risk and ReturnThe appetite of the client will be instrumental in the selection of the typeof investment chosen. If he is seeking a superior rate of return, he mustbe ready to accept and shoulder a bigger risk level. This means that he

must accept the possibility that his investment may result in a loss.Conversely, the scenario is different with someone who is conservative.He is more interested in protecting what he has. In this case, he shouldaccept the fact that his investment may not result in superior returns.

3. TenorThe length of time a person intends to hold on to his investment has abearing on his choice of assets. The longer the timeframe is, the morelikely that he will get a rate of return on the basis that he absorb a higherrisk level. Conversely, for a shorter investment period, return is normallyless with the clients not willing to tolerate high risk.

4. Fund Size An investor with a fairly large amount of funds will be more ready tocommit his money for investment into different investment types andinstruments.


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3.2 Islamic Investment

One of the critical tasks under wealth management in wealth accumulation.Investment is a major vehicle towards this end.

Unlike saving, whose main action is preservation of wealth, investmentfunction as a means to expand the existing wealth. In the quest to expandexisting wealth, investment involves the process of risking the amount savedtoday in order to generate more wealth.

Investment generates return in the form of dividends and capital gains. Thisway wealth is created.

Islamic investment differs from conventional investment only in so far as theneed to observe shariah principles is concerned. Among of the elements tobe avoided under Islamic investment are:

1. riba / interest2. gharar / uncertainty3. maisir / gambling4. arak / liquorIn addition to the above, investment that involves activities that are againstthe shariah such as pork, immoral activities are also to be avoided.

In short, the Islamic wealth client who wish to make an investment will haveto keep his wealth accumulation endeavours in compliant to the shariah.

Investment must be made only in the ethical sectors. It cannot be made inactivities such as pornography.

3.3 Shariah Principle in Investment

1. Investment must not violate shariah principle and investor cannot placehis money in companies that run business that is not in line with shariahsuch as riba, maisir and gharar.

2. The debt-to-equity ratio of a company should not exceed one third of theequity. (This is an opinion by a segment of the shariah experts, whileothers quote higher percentages)

3. Income from non-halal activities should not be more than 5% of totalrevenue. If it is more than 5%, it should be separated and cleansedaccordingly.


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4. If the main business of the company is permissiable, its internal activitiesmust also be shariah compliant e.g. a textile company is by natureshariah-compliant, however on a closer look, internal operation may becompletely non-islamic.

Due to the difficulty in ensuring a wholly shariah-compliant revenue, shariahrecognizes the need for cleasing the non-shariah revenue.

Shariah governance within the ambit of corporate governance

Corporate governance refers to the method by which corporation is directed,administered or controlled

Since Islamic FI in many ways is similar to the conventional FI, the existenceof a proper framework of corporate governance is a matter of dire necessity

However, different from conventional FI, Islamic FI has the responsibility toensure the compliance with the Shariah principles in its products,instruments, operations, practices, management etc

Hence, Shariah governance is another component that is peculiar exclusivelyto Islamic FI

The importance of Shariah governance in Islamic banking & finance

Shariah compliance is the backbone of Islamic banking & finance It gives legitimacy to the practices of Islamic banking & finance It also boosts the confidence of the shareholders and the public that all the

practices and activities are in compliance with the Shariah at all times

What is Shariah Supervisory Board?

An independentbody of specialised jurists in fiqh al-muamalat(Islamic commercial

jurisprudence). However, the Board may include a member other than thosespecialised in fiqh al-muamalat, but who should be an expert in the field of Islamicfinancial institutionsand with the duty of directing, reviewing and supervising theactivities of the Islamic financial institution in order to ensure that they are incompliance with Islamic Shariah rules and principles The fatwa and rulingsof theShariah Supervisory Board shall be bindingon the Islamic financial institution


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Among common practice

Appointment of In-house Shariah Supervisory Boardmembers Some Islamic financial institutions have established their own dedicated

Shariah Review and Audit Departmentor unit to supportShariah Supervisory

Board

Main responsibilityof the SSB with the assistance of the department is on Ex-ante and ex-postShariah rulings, and

Monitoringand supervising

Composition

The AAOIFI Standard requires at least 3 individuals Legal/statutory requirement varies

o From 1 individual, oro At least 3 individuals (Malaysia)

In contemporary practice, most of the Islamic financial institutions appointbetween 3 to 6 members to the Board

Qualification (MALAYSIA)

A member of a Shariah Committee shall be an individual. A company,institution or body shall not constitute a Shariah Committee

The member of the Shariah Committee shall at least either havequalificationor possess necessary knowledge, expertise or experience in:

1. Islamic jurisprudence (Usulal-Fiqh); or

2. Islamic transaction/commercial law (Fiqh al-Muamalat)

3. Paper qualificationon the above will not be mandatoryas long as the

candidate has the necessary expertise or experience in the above areas


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Shariah screening methodology

The Shariah screening process has been designed to satisfy three core principles.

These principles are that the screening process should be:

1. ConservativeThe process is responsible for ensuring Shariah compliance of the stockuniverse covered. This responsibility is undertaken with the utmostseriousness both for the comfort of the users of the indices derived by FTSEfrom the screened universe but also as a core component of the groupsbusiness strategy. As a result the burden of proof is laid upon the process todemonstrate Shariah compliance for a company before it becomes part of theeligible universe. If the data to establish Shariah compliance is unavailable, noassumptions regarding the Shariah status of a company is made under anycircumstances. In essence, all companies are non-compliant until shownotherwise.

2. ConsistentWe strongly believe that for the process to be valid it must be consistentlyapplied over time and across geographies. With this in mind, Yasaar hassought to remove as much subjectivity from the process as possible. A rules-

based approach achieves this by keeping to strict, unchanging guidelines andnot relying on the opinion of an individual at any particular time. To ensureconsistency across the global securities universe, it is also necessary for theserules to be applied to a consistent global database. To achieve this, we workwith an experienced company using some of the most respected sources ofglobal data available.

3.AuditableThe comfort of users of the screens is derived in part from the robust

processes established but also from the knowledge that this process has beenoverseen and monitored by our Shariah Board. The Shariah Board monitors,reviews and audits the process at regular intervals. The screens are updateddaily and audit trails of any changes in the Shariah status of companies areavailable to the scholars for review as well.


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TOPIC 4: TYPES OF INVESTMENT

4.1 Introduction

As the financial market now is flooded with Islamic instruments such as sukuk,

NICD-I, Ba-I, halal stocks and shares, Islamic unit trusts, REITS-I and Islamicstructured products, the task of choosing Islamic investment is not as difficult asbefore.

There are many investment instruments available for the clients to invest theirmoney. Among the common ones are as follows:

1. Stocks And SharesStocks and shares are the most common means of money being invested bythe clients. Most of the stocks and shares in the Bursa Malaysia are

permissible in shariah, with the exception of those in the riba, maisir, ghararand liquor manufacturing activities. The risk in investing money in stocks andshares is high. However, the return on investment could be attractive.

2. Unit TrustsUnit trust is a portfolio of investment comprising shares, sukuk and moneymarket instruments. This form of investment is pursued by the clients whobelieve in diversification of risk. They also believe that investment managersare better at handling their investment.

Definition: Unit trust is investment instruments in which many investors who

share similar investment objectives pool their resources together which are

then invested by specified fund managers in specified or authorized securities.

There is no profit sharing between the fund manager and the investors but a

fee known as ujrah is incurred by the investor for the professional services

under Al-wakalah contract.

In the Islamic unit trust, there is usually a shariah panel (shariah supervisory

board) which decides which share to fund by using the Activity or StructureMethod. Aside al Wakalah agreement, Islamic unit trust also involves onindirect Musharakah system (equal to unequal share partnership) betweeninvestor and companies trading stocks or bonds. Capital gains and dividendsare for investor but every purchase or sale of units, the company (fundmanager) receives a fee. Any losses incurred due to adverse marketconditions do not affect the shareholders wealth.

There are two categories of unit trust in the market:

a. Conventional unit trustb. Islamic unit trust


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Islamic unit trust contains shares and other financial instruments that are inconformity with the shariah.

Most Islamic unit trusts run on the principle of mudharabah. Under this, theclients entrust their money with the investment management company. Profitgenerated out of this investment is shared between the clients and thecompany based on the pre-agreed profit-sharing ratio. Other fees may beimposed by the company.

3. Takaful ProductsThe clients money also be invested in takaful products. Takaful works ontwo main principles:

a. Mudharabah The mudharabah principles under this category is similar to the unittrust investment above.

b. Tabarru Tabarru means donation. Takaful scheme will ensure that the insured

be compensated for a certain calamity befalls on the insured and / orhis family.

4. Money Market InstrumentsThere are quite a number of money market instruments available. Some ofthem are:a. Negotiable Certificate of Deposits (NCD)

- These are guaranteed by the bank and can usually be sold in a highlyliquid secondary market, but they cannot be cashed-in before maturity.

- Due to their large denominations, NCDs are bought most often bylarge institutional investors. Institutions often use these as a way to

invest in a low-risk, low-interest security.

b. Bankers Acceptance (BA)- A short-term credit investment created by a non-financial firm and

guaranteed by a bank.

- Acceptances are traded at a discount from face value on thesecondary market. Banker's acceptances are very similar to T-billsand are often used in money market funds.

-


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c. Treasury Bills (T-bills)- Bills issued by Treasury and sold to investor on a discounted

basis.- The proceeds of these bills are used with maturities of 3

months, 6 months and 1 year.

d. Malaysian Government Securities (MGS) / Sukuk- Interest bearing long-term bonds issued by the Government of

Malaysia for financing development expenditure.

An important attribute of all money market products is that there are highlyliquid. They can be turned into cash almost immediately. As such, they are

very useful in the management of liquidity. Normally, return of moneymarket instruments is not as high as that under stocks and shares. The riskis there especially if there is a swing in the interest rate movement in themarket.

4.2 Banking ProductsDefinition - goods and services produced by banks for customers.

a)Saving account

What DoesSavings AccountMeans?-A deposit account held at a bank or other financial institution that provides principalsecurity and a modest interest rate.

-Example: Wadiah Savings Account-i

Bank Islam offers Wadiah Savings Account facility for you to save your money.

Based on Wadiah contract, this facility provides hassle free safekeeping of yourmoney and allows easy access for withdrawals whenever needed.

b)General Investment Account

A general investment account-i is a form of savings kept with a banking institutionfor a stated period. The profit for a general investment account-i is generally higherthan a normal savings account-i. Most banking institutions offer general investmentaccount-i of various tenures to cater for the needs of consumers.
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c)Structured Products

Definition- Structured products are synthetic investment instruments speciallycreated to meet specific needs that cannot be met from the standardized financial

instruments available in the markets. Structured products can be used: as analternative to a direct investment; as part of the asset allocation process to reducerisk exposure of a portfolio; or to utilize the current market trend.

d) Wealth Management Products

A type offinancial service that combines personal investments, tax planningstrategies, estate planning and legal counsel.

- Stocks and Stocks Trading

- Equity Linked Investments-Structured Savings Products

-Structured Investment Products and Derivatives

-Foreign Exchange

-Alternative Investments like private equity, arts, and etc.
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TOPIC 5: DIRECT INVESTMENT

Investment can be undertaken via the following:

1. Direct Investment by an IndividualThe individual himself will be making decisions about where his funds areultimately placed. He could place his money in fixed deposits/generalinvestment account, shares, properties or some other forms of asset.Towards this end, he could make use of an intermediary e.g. brokers. Theindividual is directly in control of his investment and as such he is fullyresponsible for the outcome of his investment.

2. Indirect InvestmentAn individual may assign a third party to undertake investment on his behalf. An example of this is unit trust investment. The individual has no directcontrol on the investment made as he has delegated it to the investmentcompany.

5.1 Investment via Banks

The elementary example of direct investment is by having an account with acommercial bank. This is where some surplus funds are kept. Most people

have invested in property especially in their own homes. Some others areinvesting funds to gain rental income and capital gain. Another avenue tomake direct investment is by buying shares directly from brokers.

Direct investment with banks is mostly in the form of fixed deposits (FD) ormudharabah general investment account (GIA) and saving deposit. Thosewho want higher returns (which is normally accompanied by higher risk) willbe investing in commercial papers such as bankers acceptances (BA) orIslamic BA. Alternatively a person can invest his money in long-termsecurities that pay regular interest / dividend. Debentures, unsecured notes,bonds and sukuk are categorized under this type of investment.

There are two types of bonds:

1. Those issued by the government which carry no or little risk, and2. Corporate bonds which carry high riskDue to the low level of risk, government-issued bonds normally yield lowerreturns. Conversely, bonds issued by corporate invariably command higherreturns.


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5.2 Investment in Property

Investment in property is one of the favourite investment avenues especiallyin home ownership category. Investors in property would normally look atboth rental income and capital gain. Property market can be classified intoseveral classes i.e. residential, commercial and industrial.

The return from property investment usually depends on type of property, itslocation and cost of upkeep. Properties in prime location will enjoy goodcapital appreciation and rental income. Many investors start their propertyinvestment with their own homes, then they move on to other residentialinvestments such as houses, apartments, flats and time-sharing rights.

The advantages of residential investment are the ease with which it may bepurchased, the relatively low down-payment needed and the ready access tobank loans. It is relatively easy to find tenants, and as such, flow of incomecould immediately start. The disadvantages of property investment are:

1. Related to the poor quality of tenants: usually led to high repair andmaintenance costs.

2. High turnover of tenantsCommercial and industrial properties may include shop-houses, premises inshopping complexes and office spaces. Depending on location, investment incommercial and industrial properties normally requires a bigger amount ofinvestment. Return on investment and capital appreciation would normally be

higher.Although investment in property normally results in a capital gain especially ifthe investors investment horizon is long term in nature, there are instanceswhere losses are suffered as a result of selling the property at an inopportunetime. Property investment is generally non-liquidas it normally takes timefor property to be sold to the market.

Apart from buying properties from the market and during new launches, aninvestor has the option to acquire them via participation in an auction.Depending on market condition, purchase of a property from an auction can

be advantageous to the buyer as the price is cheaper.Purpose of Investment in Property

1. Steady income stream2. Capital appreciation


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How to Avoid Making Costly Property Investment BlundersPosted Date: Mar 01, 200

By: Milan Dosh

Real estate investments enable you to accumulate wealth and to you attain yourfinancial goals within a desired timeframe. Unfortunately, many novice investorswho lack an understanding of the common real estate investment pitfalls can easilylose instead of make money.

Before jumping in, its extremely important to understand and avoid the maincauses of failure. These are:

1. Lack of Right Education

The major cause of most real estate investment failures is probably careless

investing. Many beginners start off by listening to friends and family members.They get free advice on what works and how to succeed. What they may notrealize is that free advice can be very expensive. It may be the case of the blindleading the blind. Learning to invest from people who have only bought one or twoproperties in their lifetime via the trial and error method is time-consuming,frustrating and expensive. You pay with mistakes costly mistakes! One wrongproperty purchased can cost you thousands of dollars and may take a few years ofyour life to undo the damage done!

With a small investment of time and money, you can easily avoid costly mistakes

and reap profits from day one. Take the time and trouble first to read all therelevant property investment books and attend educational courses on thissubject. After all, the best real estate you can ever invest is in the real estatebetween your two ears! You should also look for the right mentors who started atthe same financial position as you - and who has achieved success with severalproperties. Learn from their experiences, avoid their mistakes and replicate theirsuccesses.

2. Inadequate Research

Another major cause of real estate investment failure is inadequate research. Whileits not that difficult to find investment properties, finding the one that is profitableis another story. Many become so excited about owning a property that they getblind-sighted. They may buy a property that looks good on the surface rather thaninvesting time and effort doing research.

A savvy investor would usually watch the market for a few months before divingin. He would select a few specific locations and get to know it well. He would getto know all the negotiators specializing in that area and details of all properties

available for sale and those that have been transacted in the last few months.


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By doing these, you will acquire a solid foundation needed to determine whichproperties and locations make investment sense. When the right property in theright location comes up at the right price, you would be able to confidentlypurchase it without any hesitation.

3. Emotion-Based Decisions

The third major cause of real estate investment failure is emotion-based decisionmaking. Successful investing is purely a numbers game and its done without anyemotions.

One of the biggest challenges a real estate investor has is in studying the numberson each and every potential property. It takes discipline and experience to pass onproperties that may look good initially, but dont stack up number-wise. Buyingbased on emotions or impulse can cost thousands of dollars, hours andheadaches. Before investing in real estate, ensure purchase decisions are basednot on emotional reasons, but on sound facts and figures. Whenever in doubt, itsadvisable to get appropriate impartial advice from other like-minded propertyinvestors.

4. Paying Too Much

Another major cause of real estate investment blunder is paying too much for aproperty. Once the papers are signed, few things are worse than discovering youpaid more than you should have. Paying in excess of a propertys worth requirestime to recoup the extra expenses and lowers your return on investment.

While individuals who buy property to live in are prepared to pay more foremotional reasons, investors should always aim to pay the fair or lower-than-market price. Its all about the numbers. Conduct thorough research on the areaand compare prices to ensure you can get a decent return on investment. Also, get

a valuation report before confirming your purchase price. In property investments,profits are made at the point of purchase, and not at the point of sale. Buying isentirely within your control, whereas selling a few months or even a few yearsdown the road may not be entirely within your control.


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5. Lack of Direction and Commitment

One more cause of real estate investment failure is lack of direction andcommitment. Treat your real estate investments as a serious business and not a

hobby. Hobbies dont make much money, businesses do! If you treat real estateinvesting as a hobby that you indulge in whenever you feel like it, youll get hobbyresults. If you set aside the time and treat is as a business, youll be able to earn aprofitable outcome. For example, one of my seminar graduates made over RM1million in profits by flipping over 10 properties in the last 5 years. He treats hisproperty investments as a serious business sideline and his goal is to flip aminimum of 2 properties each year.

6. Neglecting Inspections

The sixth major cause of real estate investment failure is neglectinginspections. Buying old properties are riskier, compared to buying brand new froma reputable developer. Obviously, the older the property, the greater the risks. Butthe risk factor can be reduced when you take all the necessary precautions andbudget additional expenses for repairs.

Professional inspections are a must when investing in real estate. You may findproperties that seem like bargains to the untrained eye, but an expert inspectorcould discover thousands of dollars in repairs that are necessary to keep theproperty running. While inspections do add one more cost to the investmentequation, theyre necessary to the successful real estate investor.

Milan Doshi, a seasoned speaker who has been running seminars on personalmoney management, property and stock market since 1998, gives a step-by-stepguide on assessing risks, looking for bargains, the potentials of choice locations andthe need to evaluate cash flow and rental returns short and long term.

Characteristic of Property

The principal characteristics of property are as follows :

It is real, physical brick & mortar Due to its scarcity property prices are always on the uptrend Property investment is always illiquid Entry costs & exit costs are always high It is expensive to maintain Diversification in property is limited due to its high prices Property market values are not subject to daily valuation


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Direct vis--vis Indirect Investment in Property

Direct property investment takes place when a person owns the property by buyingit directly and he is the registered owner of the property.

Direct property investment can be broken into various classes ie :

Residential property Retail Commercial Agricultural Industrial

Indirect property investment are investment which result in property being ownedvia a third party eg :

Real Estate Investment Trust (REITs) 0 both Listed and Unlisted onStocks Exchanges

Property Securities Funds Unlisted Trusts that hold investment inListed Property Trusts

Mortgage Funds Trusts that hold Mortgages over Properties Mixed Funds Funds that hold some Properties plus Other Assets Private Property Syndicates Small group of Investors pooling Funds

together to purchase Properties

Residential Property

A mixture of the following reasons have seen the investment in residential propertygrew rapidlny which have resulted in a significant rise in their prices :

Limited supply of land zoned for residential development Increased cost of developing residential units Easy availability of credit to purchase houses


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Commercial Property

This is largely the domain of institutional investors and high net-worth individuals(HNWI) as the amount of money needed is normally beyond the reach of individualinvestors. Commercial property comprises a wide range of real estate :

Central business district (CBD) Regional centres Offices Retail Industrial factory Warehouse Infrastructure Hospitality Leisure

Each of them has its own unique risks that investors will have to brace themselveswhen they decide to invest in them. Unlike investment in residential property,purchasing a commercial property requires in-depth knowledge in local geographicareas, trend in consumer demand & labour supply, lease agreements, zoning,

restrictions and redevelopments potentials.

Normally the rate of return on commercial property is better to that of residentialproperty. Rental income from commercial property is of a higher quality ( it has abuilt-in rent increases ) and superior vis--vis residential property.


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TOPIC 6: PROPERTY FUNDS

Generally property funds are pooled investments where the assets are divided intounits. Investors are unit holders & beneficial owners of the properties with the legalowners being the trustee.

i. Real Estate Investment Trusts (REITs)A REIT is a special type of mutual fund or stock exchange. Like other mutualfunds, REITs allow small investors to participate with a low minimuminvestment. However, whereas other mutual funds invest only in financialinstruments, REITs also invest in real estate and/or mortgages. So, it is avehicle which mobilizes funds from the unit holders comprising individuals andcompanies for investment in real estate. Income generated by REITs camefrom rents on real property and/or interest payments on mortgages and willpass through shareholders. Unit holders in REITs receive dividends & capitalgain raising from the rise in the market value of the units.

ii. Unlisted Property Trusts (UPTs)UPT is not listed on the stock exchange. They are an open-ended investmentvehicle which means new units can be issued. An open-end(ed) fund is acollective investment scheme which can issue and redeem shares at any time.

An investor will generally purchase shares in the fund directly from the funditself rather than from the existing shareholders. Proceeds from new units can

be used to purchase new properties.

UPTs are smaller in size vis--vis REITs. Being unlisted, unit holders in UPTsface higher level of risks with unit holders being unable to sell their unitsand the possibility of losses being incurred by them due to selling pressure.To mitigate liquidity risk, UPTs invest in REITs.

iii. Property SyndicatesDue to high prices of commercial properties, an individual investors hope to

gain from capital appreciation is by pooling their funds together to form aproperty syndicate. Normally, the syndicate has a short life-span, i.e about 5-7 years. They gang up to buy a particular property & exit a few years later.
http://en.wikipedia.org/wiki/Collective_investment_schemehttp://en.wikipedia.org/wiki/Collective_investment_scheme


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iv. Property Securities Funds (PSFs)PSFs investment funds in REITs and other types of property funds. As such,PSFs are more liquid. They are good insofar as assisting investors indiversifying their money.

v. Mortgage FundsMortgage funds are listed funds which hold mortgages against property.Mortgage Funds enable investors to invest in a fund which holds a number ofmortgages. Returns to the investors are in the form of fixed interest ratebased on repayments by the mortgagors.

Usually, Mortgage Funds hold first time mortgages up to 65% Loan to

Valuation Ratio (LVR) in order to minimize default risks.

vi. Mezzanine FundsThis is generally a risky investment by an investor. Mezzanine funds lendmoney to developers who need money over & above those that they alreadyborrowed from banks. As this carries more risks interest rates charged bymezzanine funds are higher than normal.

vii.

Hybrids FundsA hybrid fund is the type of funds that invests in a mixture of units in REITs,UPTs, Syndicates etc. A hybrid fund may also borrow money from banks toimprove earnings to the unit holders.

viii. Advantages in Investing in Property FundInvestment in property funds allow investors to diversify their risks both by

asset class & geographical location. Investors share the dividends and capitalappreciation that comes with owing units in the property funds. This isalmost hassle-free investment in property as maintenance and other functionsrests with responsible entities (RE) which comprise large corporations ormanagers.

Another advantage investing in property is the steady stream of incomederived from property portfolio. Research shows income derived fromproperty funds is much less volatile vis--vis investment in shares.


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TOPIC 7: INVESTMENT IN SHARES

Shares are commonly called common stock and equities. Investment in shares has

become more popular especially in market that have seen steady rise in shares

prices.

Most of the time, buying shares via initial offers (IPOs) would result in good capital

gains. This is due to the fact that IPO shares are generally underpriced. The

participants in the equity market comprise listed corporations, investors and brokers.

Corporations are mainly interested in rising capital. They use the secondary market

to purchase shared in other companies either for reasons of strategic alliance,

takeover or merely for investment purposes.

Investors buy shares in companies for their dividends and capital appreciation. On

the other hand, speculators are those that buy and sell shares with quick profitbeing their main intention. Arbitrageurs are those that buy & sell simultaneously

similar financial assets in different shares markets to profit from unequal prices.

Hedgers are those that hold two or more financial assets in the expectation that

offsetting price movements will eliminate risk.

All this participants perform useful functions within financial markets. They provide

depth in buying and selling shares which tend to make markets more efficient.

Prices are easily available in the markets.

What is initial public offering?

initial public offering (IPO), is the first sale of stock by a formerly private

company. It can be used by either small or large companies to raise expansion

capital and become publicly traded enterprises. Many companies that undertake

an IPO also request the assistance of an Investment Banking firm acting in thecapacity of an underwriter to help them correctly asses the value of their shares,

that is, the share price.
http://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Private_company


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7.1 Nature Of Stock Market

Shares can be sold in private by owner himself or via a broker appointed by the

owner himself or via a broker appointed by him. However most of the trading is

done on the stock exchanges. Most trading is executed by members of theexchange on behalf of the clients. The share prices are determined by the

interaction of demand and supply of the counter in the market.

Many factors are likely to affect demand and supply of shares and hence, share

prices in the market as follows :

1.Profit reports

-A financial statement that summarizes the revenues, costs and expenses

incurred during a specific period of time - usually a fiscal quarter or year. These

records provide information that shows the ability of a company to generate profit

by increasing revenue and reducing costs. The P&L statement is also known as a

"statement of profit and loss", an "income statement" or an "income and expense

statement".

2.Earning & dividends

Dividend-paying stocks need earnings sufficient enough to support payinginvestors. Beyond that, you should evaluate if the following stocks will give youthe best return given your risk and time horizon.

3.Quality of management

-Because people run companies, any investment opinion about a company is anopinion about the likely outcome of the combined efforts of the people who work for

and manage it.

-Investors can easily familiarize themselves with the backgrounds and qualificationsof the managers of the companies they invest in by checking their biographies oncompany Web sites or in the annual proxy statements sent to shareholders

4.Industry events

The demand and supply of the shares increase when the rapid growth in the

industry but decrease when the industry becomes less important in the economy.


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5.Changes in prices of inputs/materials

-Share prices change because of the demandand supplyconcepts

-If people wanting to buy stocks exceeds the amount of people wanting to sellstocks, then the price is driven up because demand is exceeding supply. On theother hand, if more people are wanting to sell their stocks than people are willing tobuy them, the share prices falls because supply is exceeding demand. These basicconcepts are fundamental to understanding howthe share price fluctuates

6.Foreign exchange

-the foreign exchange market is a global, worldwide decentralized financial marketfor trading currencies.

-The primary purpose of the foreign exchange is to assist international trade andinvestment, by allowing businesses to convert one currency to another currency.

-depreciation in the currency has carried with it the downfall of the stock market.

-Fluctuations in exchange rates are usually caused by actual monetary flows as wellas by expectations of changes in monetary flows caused by changes in grossdomestic product (GDP) growth, inflation interest rates and etc.

7.Interest rate level

-An interest rate is the rate at which interest is paid by a borrower for the use ofmoney that they borrow from a lender.

-Risks of investment: There is always a risk that the borrower will go bankrupt,abscond, die, or otherwise default on the loan. This means that a lender generallycharges a risk premium to ensure that, across his investments, he is compensatedfor those that fail.
http://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Exchange_rateshttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Lenderhttp://en.wikipedia.org/wiki/Bankruptcyhttp://en.wikipedia.org/wiki/Default_%28finance%29http://en.wikipedia.org/wiki/Risk_premiumhttp://en.wikipedia.org/wiki/Risk_premiumhttp://en.wikipedia.org/wiki/Default_%28finance%29http://en.wikipedia.org/wiki/Bankruptcyhttp://en.wikipedia.org/wiki/Lenderhttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Exchange_rateshttp://en.wikipedia.org/wiki/Currency


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7.1.1 Analysis Of Shares

In order to choose a share over others, an investor will have to conduct the

following on the companies :

1.Liquidity

-refers to how easy it is to buy and sell shares without seeing a change in price. If,

for example, you bought stock ABC at $10 and sold it immediately at $10, then the

market for that particular stock would be perfectly liquid. If instead you were unable

to sell it at all, the market would be perfectly illiquid. Both of these situations rarely

occur, so we generally find the market for a particular stock somewhere in between

these two extremes.

2.Capital structure

-In finance, capital structure refers to the way a corporation finances its assetsthrough some combination of equity, debt, or hybrid securities. A firm's capitalstructure is then the composition or 'structure' of its liabilities. For example, a firmthat sells $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed.

3.Profitability

-as market share increases, a business is likely to have a higher profit margin.

-advantages of large market share are greatest for businesses selling products thatare purchased infrequently by a fragmented customer group.

4.Dividends

-Dividend per share (DPS) is a simple and intuitive number. It is the amount of thedividend that shareholders have (or will) receive for each share they own.

DPS= dividends paid number of shares in issue

-Most companies avoid dividend cuts unless their financial condition demands it orthere has been some other change in the business or its capital structure. As a resultof this, increases in the dividend are taken to be a sign that the management isconfident that the new level can be maintained or improved on.
http://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Hybrid_securityhttp://moneyterms.co.uk/capital-structure/http://moneyterms.co.uk/capital-structure/http://en.wikipedia.org/wiki/Hybrid_securityhttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Finance


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5.Market valuation

- is the total market value of a company, calculated by multiplying the price of itsshares on the Stock Exchange by the number of shares outstanding.

-In financial markets, stock or shares valuation is the method of calculatingtheoretical values of companies and their stocks or shares. The main use of thesemethods is to predict future market prices, or more generally potential marketprices, and thus to profit from price movement.

6.Risk

-In the shares or investment, high risk will give the high return and low risk will givethe low return.

7.Technical analysis

-Technical analysis is a financial term used to denote a security analysis discipline forforecasting the direction of prices through the study of past market data, primarilyprice and volume.

Shares in companies are bought and/or sold if analysis conducted shows that they

are generally favourable and are expected to appreciate in market value.

7.1.2 Accessing The Share Market

Individual investors can access the share market via stockbrokers who will buy and

sell shares on their behalf. Shares can now be bought and sold online via internet.

Most brokers insist that the clients hold funds in the accounts accessible by the

broker for any buy transactions. Buy transactions must be settled by the third day

after the transaction or a substantial fine is levied.
http://en.wikipedia.org/wiki/Financial_marketshttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Security_analysishttp://en.wikipedia.org/wiki/Security_analysishttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Financial_markets


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TOPIC 8: INDIRECT INVESTMENT

Indirect investment is the term used to describe a scenario when investors place

their funds with fund managers who use investment vehicles such as unit trusts,

managed investment schemes and superannuation funds to consolidate the

investors funds and then invest the pooled funds according to their own stated

strategies.

8.1 Managed Funds

Managed investment funds gained impetus from the development of the unit trusts

which offered a vehicle for the funds of many small investors to be pooled so that

relatively large assets can be owned. Managed funds have evolved into investment

vehicles that allow investors to choose fund managers and asset types to make

either periodic payments or lump-sum contributions to maintain their desired levels

of risks in their investment portfolio.

8.2 Characteristics Of Managed Funds

A managed fund is a purpose-built, where the rules and regulations for the operation

of the fund are established prior to the actual solicitation of funds from investors.

Investors in managed funds become unit holders in the fund through the purchase

of units in the fund. Managed funds provide investors with pooled investment

structure, where the funds so collected are being invested in the wholesale financial

markets. One of the benefits of managed funds is lower cost associated with

investing, due to the spreading of investment across different asset classes. One of

the important attributes of managed funds is that they are being managed byprofessional managers/investors.

Managed funds allow ordinary investors to gain access to highly specialized assets

and investments such as in industrial property, office building and index fund.

Most of the managed funds are listed in the stock market to facilitate trading for the

units between unit holders. This enhances liquidity.


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8.3 Structure Of Managed Investment Scheme/Unit Trusts

The key characteristic of a unit trusts the pooling of small investment amounts into

larger funds to enable benefit scale to occur in investing. The fund manager would

then be able to invest in the wholesale market at a relatively lower cost and would

potentially yield better returns.

Unit holders are the investors in the fund/scheme. They are the beneficiaries of the

fund. However they do not own the assets of the fund. They are simply investing in

the funds assets to generate a return.

Unit holders receive a certificate detailing the number of units they have purchased

and the purchase cost.

Management Company:

The management company is the promoter of the fund to the public and provides

investment expertise to manage the fund and has primary responsibility of investing

the funds according to the objectives. The management company also acts as theRegistrar of the fund maintaining the records of the unit holders.

Trustee:

The trustee can be the Public trustee of Malaysia or any independent trustee of

Malaysia or any independent trustee companies. A trustee generally reputable

financial institution appointed by a deed of Trust to look after the interest of the unit

holders.

Investors or unit holders:

The providers of funds purchase of unit trusts from the management company

would expect to receive benefits from the investment. They also can sell the unit

trusts back to the management company.


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Advantages of unit trusts:

DiversificationMany investors lack sufficient resources to establish an adequate

diversification on their own. By owing shares in unit trusts Management

Company, diversification is obtained by the investor.

Funds with the variety of objectivesWe have seen different types of funds are created for different

investment objectives. So investors should have no problem finding

funds that meet their own objectives in term of return and risk.

Record keeping servicesUnit trusts management companies perform various services for their

shareholders. The management company maintains and administers the

records of shareholders activity for a given year.

Professional managementFund manager who are knowledgeable about investment, with good track

records of performance, high integrity, etc. are employed to give the best

recommendations on portfolio of securities to invest.

High liquidityUnit trust can be bought and sold easily. Thus they do not suffer from

liquidity risk.

AffordabilityOnly a small amount of money is needed to participate in a portfolio of

investment which enjoys the same benefits as in direct investment which

requires large amount of capital.


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Disadvantages of unit trusts:

Load feeThis is sales charge added to the funds NAV when unit trust is sold. It is

as high as 10%. Under the new guidelines, the bid and offer price is

determined by the management company and disclosed in theprospectus. The fund manager may adjust the prices as he thinks fits.

High annual expenseThe operating expenses like accounting, legal, postage, management

fees have to be borne by the investors. The management fees forms the

largest component of the expenses thus reducing the profit to the

investors.

Transaction costsManagement companies must also pay transaction costs to buy and sell

securities even though they trade in large blocks. This discourages

trading unless the potential profit is substantial.

8.4 Unit Trusts As A Diversification Tool

Investing in unit trusts provide investors with greater of assets for a given capital

size. Bu owning unit trusts, investors can build a diversified portfolio of investments

because they are accessing more than one investment in more than one asset class.

The main asset classes are cash, fixed deposits, property and equities.

Generally, unit trusts invest heavily in financial assets (mainly shares) and a small

amount in property and mortgages.

8.5 Benefits Of Diversification

Diversification is the spreading of investment across different asset classes with a

view to generate sustainable profits/earnings. Overall, the yield expected out of a

successful diversification strategy is consistently good profitability.

Through unit trusts, investors can achieve diversification across managers, across

investment sectors and across countries.


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8.6 Unit Prices

Investors buy units in a unit trust. Units are segments of ownership of asstes in the

fund. As such, a unit price is the value of the funds assets less its liabilities,

divided by the number of unit issued. This is know as the funds Net asset Value

(NAV):

NAV = (Fund Asset Fund Liabilities)/No. of Unit Issued

Back to Basics Understanding Managed Funds

By Michael Lannon

Last year was a good year for investors in the share market. However it is important

to not lose sight of the basics of investment. This month we look at managed funds.

From young investors starting out to seasoned investors that are running their own

super fund managed funds can be a key ingredient in a well diversified investment

portfolio. Many Australian investors need to increase their exposure to International

shares and managed funds are the ideal vehicle to achieve this diversification goal.

The following should help you to understand the key facts about managed funds.

What is a managed fund?

A managed fund is a pool of money invested by many people who have similar

investment goals. A professional fund manager invests the funds money on behalf

of its many investors according to stated investment goals. For example, a share

funds objective may be to outperform the overall share market over five years,

while a fixed income fund might aim to provide investors with regular monthly

income that offers a higher return than the current interest rate.

Note: Managed funds can be either superannuation funds (managed funds in

which you invest your super contributions) or ordinary or non-super funds

(managed funds in which you invest money from other financial resources). Each

type has different investment features and tax consequences.


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What are the key benefits of managed funds?

Investing in managed funds has many benefits, including:

Access to a wider range of investments

Pooling your money with other investors means you have access to

investments that are not normally affordable or available, such as commercial

property or international shares.

Diversification

Managed funds can invest in a large number of investments across a wide

range of asset classes. This results in a level of diversification that would be

difficult to achieve on your own.

Funds that suit you

There are a large number of superannuation and ordinary managed funds

available, and each follows a carefully selected investment strategy. With the

help of a financial adviser, or through your own research, you should be able

to find managed funds that suit your personal financial goals.

Expert management

Fund managers use a range of investment resources, skills, and experience to

protect your money. This means you can rest easy, knowing your money is in

good hands.

Regular investment option

Most managed funds offer the convenience of a regular investing option, such

as automatic withdrawals from your bank account. This feature makes it

easier to achieve your investment goals with less time and effort.Why not

consider investing your new tax cut this way?


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Investor protection

Ordinary or non-super managed funds are operated by a responsible entity,

which protects the interests of all investors. Responsible entities are regulated

under the Corporations Act and administered by the Australian Securities and

Investments Commission (ASIC). Superannuation funds are managed by a

trustee, who protects investors retirement savings and is subject to

regulation under both the Superannuation Industry (Supervision) Services Act

and the Corporations Act.

How do managed funds work?

When you invest in a managed fund, you buy units of ownership in that fund, which

is similar to buying shares in a company. As the value of the funds investments rise

or fall, the funds unit price moves accordingly. So this means the value of your

investment will rise and fall as well, and you may achieve capital growth (or loss)

when you sell your units.

Managed funds also generate income in the form ofdistributions, which are paid

on a regular basis normally monthly, quarterly or half-yearly. Each distribution is

based on the earnings of the managed fund, which can come from share dividends,

rent from property, interest from fixed income investments and any capital gains

realised on these assets.

Investors in an ordinary or non-super managed fund can either accept the income

from distributions as cash or reinvest it in the fund. However, superannuation funds

will always reinvest distributions, as they are designed to help build your retirement

savings.


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Which funds may be right for you?

If you decide that managed funds can help you achieve your investment goals, the

next step is to choose the funds in which you should invest your money.

Investment Tips

Managed funds can be a cost-effective way of diversifying your investments

while gaining access to professional investment management skills.

By choosing to reinvest the income from your managed fund, you can benefit

from the effects of compounding returns.

How do managed funds differ?

The primary distinction is between superannuation and ordinary or non-super funds.

Managed funds can also differ in their asset allocation strategy, or how their assets

are invested in order to achieve their investment objective.

The role of the fund manager

Before looking at other differences between managed funds, its important to explain

the important role fund managers play in whether funds achieve their investment

objectives. Not only does a fund manager ensure that a funds assets are invested in

the type of individual investments that fit the funds investment strategy, they must

also keep an eye on the overall asset allocation of the fund. This requires the fund

manager to focus both on individual investments in the fund, as well as maintain a

big picture view of the funds holdings.


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TOPIC 9: MANAGING PERSONAL RISK VIA INSURANCE

An important element of a financial plan is its ability to provide financial security

against known risks such as death and permanent disability. As such, in developinga financial plan, it is important to analyze and understand the risks and examine

ways to minimize or eliminate them.

9.1 Risk

Risk insofar as an individual is concerned, can be categorized into 2 i.e :

(a) Speculative risk - A category of risk that, when undertaken, results in

an uncertain degree of gain or loss. All speculative risks are made as conscious

choices and are not just a result of uncontrollable circumstances.

(b) Pure risk -A category of risk in which loss is the only possible outcome; there

is no beneficial result. Pure risk is related to events that are beyond the risk-taker's

control and, therefore, a person cannot consciously take on pure risk.

Opening up a business involves speculative risks as the business has 2 outcomes i.e

succeed or fail.

Pure risk arises where there is only a possibility of loss. Insurance companies

provide coverage against pure risk.

Pure risks exist in quite a number of forms:

Personal Illness, death, incapacity and unemployed

Property Fire, accident

Liability Losses suffered due to legal issues


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9.2 Management Of Pure Risk

Management of pure risk (in an individual) is an adoption of the risk management as

per the practice applied in the corporations. This is the risk that is peculiar to an

individual.

The process involved in managing pure risk is largely similar to that being practiced

by the corporates in managing their risks ie:

Identify & evaluate potential risks sources of possible losses Manage the risks How to minimize losses & measures taken to

address losses & avoid future losses

Constant review of the programme of managing pure risk so as itcontinues to be relevant

9.2.1 Identification Of Personal Risk

Premature Death Prolonged illness/injury High medical cost

Premature Death

The financial effect of a premature death depends on whether the person is the sole

income-earner of the family, size of the family and financial needs of the family.

If reliance on the persons income is high, there is a need to arrange for insurance

coverage to insulate the family from the risk.

Prolonged Illness/Injury

Financial needs of a person with prolonged illness/injury will be high especially those

that self employed and those without insurance cover. Those that are employed are

normally provided with medical benefits by the employers.

High Medical Costs

It is big burden to a person when faced with high medical costs. If he is employed,workers compensation insurance will take care of the burden.


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Business Risks

One of the business risks faced by a partner to a partnership is the need to come up

with money to take over the deceased partners share of the business. The partnermay not have the money.

9.3 Evaluation Of Personal Risks

To arrive at the amount to be insured the following have to factored in :

Costs involved in premature death Amount needed by the dependents after premature death Amount needed after disablement

On a premature death, a certain set of expenditure has o be incurred ie:

Burial expenses Medical care expenses before death Settlement of debts Estate administration costs

Costs incurred by the dependents upon a premature death include :

Costs in bringing up dependents ie food, lodging, education and related costs.

Dependents may include older relatives.

Provision for possible disablement of the income-earner should also be made. This

includes:

Medical expenses Costs associated with disability Income to support dependents

An insurance policy which covers both the lump sum need for fund in a premature

death and the need for recurring income after the death of the income earner, has

to be bought. The total and permanent disablement (TPD) extension od a life

insurance policy could meet these needs.


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As a rule of thumb, a person with an annual income of RM40,000 and the markets

return on investment is 6%, the necessary sum insured is about RM670,000 or

(RM40,000/0.06)

9.4 Risk Management Of A House

A house is subject to a range of perils ie. fire, storm, burglary and earthquake.

When assessing the appropriate amount to be insured, the value relates only to the

building. Land is excluded as it would not normally suffer from fire. As the

house/building depreciates in value, the main factors that keep the value increasing

are the land itself, renovation & improvements made to the premises and the house

contents. In arriving at the amount to be insured, the property covered by the

policy normally will be valued at the replacement value price.


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TOPIC 10: RISK MANAGEMENT AND TAKAFUL

Under conventional system, wealth protection is undertaken through the purchase ofinsurance policy. However, under Islamic wealth management and financialplanning, wealth protection is carried out through participation in a takaful scheme.

Under both insurance and takaful, the client will be the beneficiary for the sumassured, should an accident happens. Although the function of both insurance andtakaful is the same, they have fundamental differences both in term of concept andpractices.

Risk is the possibility of suffering from harm/loss. Risk can be assessed both

qualitatively and quantitatively. Types of risk include credit risk, forex risk andpolitical risk. Risk could also be classified into pure risk and speculative risk.

Pure risk is a category of risk in which loss is the only possible outcome and there isno favourable outcome. Examples of pure risk are fire, flood and earthquake.Speculative risk, on the other hand, has three outcomes i.e. loss, gain, andbreakeven. Outcome of an investment belongs to speculative risk.

10.1 Managing Risk

Risk management process involves the following :

a. To establish types of riskb. To define the risk and parameter of the riskc. To assess the riskd. To manage the risk via avoidance, sharing, reducing or transferring to a thirdparty.e. To monitor and review of the action taken.

In the above process, insurance and takaful become relevant as an instrument tomanage the risk. Generally, for most people, managing risk is a simple process i.e.buying an insurance or takaful and pay its premium monthly. However, serving theprotection needs of high net-worth individuals (HNWI) is complicated and more ofthe than not, requires customization arising from their individuals unique attributes.


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10.2 Risk Mitigation Via Takaful

Islam encourages effort to mitigate risks. A hadith amply illustrated the need to dosomething first before leaving the fate to the God.

Under Takaful, tabarru (or donation) is the core concept. Tabarru means anundertaking by a participant to relinquish as donation, a certain portion of his takafulcontribution. Thus, this enables him to fulfil his obligation to mutually help andguarantee the well-being of fellow participants.

Tabarru concept eliminates the element of uncertainty from the takaful contract.The sharing of surplus or profit may only be known after the obligation to helpfellow participants has been fulfilled. As such, takaful operation may be envisagedas a profit sharing business between takaful operators (acting as managementcompany) and the participants. Takaful operators earn his income from two sourcesi.e. in management fees and profit from pre-agreed contract with the participants.

10.3 Why A Client Need A Takaful

There are a number of reason why a Muslim needs to have a takaful coverage. Allof them are in relation to the fulfilment of the maqsid-al-shariah as follows:

i.To protect his religion

ii.To protect his family

iii.To protect life

iv.To protect intellect

v.To protect wealth

vi.To protect honour/dignity

10.4 Recent Development

Unlike insurance, takaful is all about co-operating among participants to help eachother against a defined loss. It is about risk-sharing solution and not risk-transferring process as it is generally understood in the conventional insurancebusiness. Currently, a lot of emphasis is placed on the introduction of hybridproducts in the form of investment-linked insurance and takaful. In hybrid products,risk and investment are bundled together resulting in products with elements ofcapital protected, capital guaranteed and guaranteed returns are churned out in themarket.

Hybird products are normally introduced to the more sophisticated customers e.g.HNWI is respond to their more sophisticated needs. Normally this segment of the

customers would prefer capital protection in addition to the possibility of a higherrate of return.


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TOPIC 11: ESTATE PLANNING CONVENTIONAL

Estate planning is a means to protect and maximize net assets available fordistribution to chosen beneficiaries. Financial planners task is to ensure that theclient has an appropriate estate plan. They should know when it is appropriate toconsult solicitors, accountants and trustees.

11.1 Financial Planners Obligations

11.1.1 Identify clients objectives and wishes

1. Knowing the clients objectives and wishes is the first step in the estate planningprocess

2. Who does the client want to benefit from the estate and how much each will get?

3. Who will control family business?

4. Who will take care disabled beneficiaries? Or beneficiaries with financial risk e.gdue to impending bankruptcy process or drug-related problems.

11.1.2 Identify assets available for distribution

The listing of asset available for distribution is necessary. This includes insurance

policies and financial assets.

11.1.3 Identify tax implications on the estate

Tax has to be factored in estate planning so as to minimize it and to maximizeassets for distribution purposes.

11.1.4 Ensure a valid and up-to-date will is executed

A valid will will incorporate the appointment of an executor to carry out theinstruction contained in the will. Only the current will will be used as the documentto distribute the assets. To ensure problem-free execution, the will should alsoaddress the potential claims on the estate by the disgruntled beneficiaries.


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11.3 Who can make a will

Anyone with testamentary capacity and over 18 can make a will.

Testamentary capacity means he understands :

i. The nature of making a willii. The nature of propertyiii. The claims of potential beneficiariesiv. The person has no mental disorderv. Some individuals with no testamentary capacity can have his will challengedvi. Financial planners are advised to establish testamentary capacity when they

are finalizing a will from an elderly client . A doctors statement about the

health of the client could strengthen the will.

11.4 Appointment of An Executor

An executor is the person appointed in the will to look after and distribute the assets

in accordance with the will-makers wishes after his death.

Functions of an executor include :

1. Funeral2. Manage legal and financial affairs3. Obtain grant of probate4. Locating , protecting , and insuring estate assets5. Pay debts with proceeds from the estate6. Distribute assets to beneficiaries7. Defending the will if challenged

11.5 Grant Of Probate

Probate means proof of the will. By obtaining the grant of probate, it confirms

that the will is valid. By having the probate, the executor has the authority to

proceed to take hold of the assets and distribute them to the beneficiaries.

On death of the will-maker, his assets will be automatically frozen and cannot

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