Central banks around the world have taken steps to lower their respective interest rates in order to stimulate economies in decline due to the difficult economic environment. This record-breaking OPR rate in Malaysia, 1.75% in July this year, has left many Malaysians in the dark about what to do with their savings.
Suffice to say that most Malaysians are used to setting aside their savings in term deposits to take advantage of interest income. But now, what was once seen as a safe haven to steadily grow your money is bogged down with record returns.
As term deposits are no longer an attractive option for generating a good return, many people are considering alternatives. So where can you find investment opportunities to earn 1%, 2% or more extra returns than holding the money in a fixed deposit?
Here are 3 investment alternatives that can help you diversify your portfolio and generate a higher return over fixed deposit money.
1. Money market funds
Money market basically means short term, low risk debt instruments. So, money market funds are mutual funds that invest in money market investments. Compared to other types of mutual funds such as bond funds and equity funds, money market funds have the lowest risk. In fact, money market funds are generally considered to be the “safest” type of mutual fund.
Money market funds invest in short-term debts of banks, corporations and governments such as commercial paper, repo agreements, treasury bills as well as ringgit deposits with local financial institutions.
Money market funds provide a high level of liquidity to investors. Many investors, while waiting for better investment opportunities, use money market funds to park their cash flow for the short term. Therefore, money market funds are generally suitable for any investor concerned with preservation of capital and liquidity.
Since money market funds are invested in bank term deposits, they are also sensitive to low interest rates. However, this perceived setback can be offset by fund managers who may also invest in short term bonds to generate higher returns for the fund.
The downside to investing in money market funds, like most mutual funds, is that an investor will face the risks of mismanagement, inflation, and unsecured returns.
Overall, the returns on money market funds are even better than those on term deposits. According to Lipper (as of September 18, 2020), the average annual return of all funds in the money market fund category is 2.37%.
2. Bond funds
A bond is legal proof of a debt, normally the result of a loan. When you buy a bond, you lend your money to the issuer of the bond. The issuer of the bond undertakes to pay you periodic interest and undertakes to repay you in full the initial capital on a certain date.
Bond funds are trust funds that invest in a variety of bond instruments, such as government bonds of developed countries, Malaysian government bonds (MGS), investment grade bonds, high yield bonds, and government bonds. Emerging Markets. Like money market funds, bond funds are generally less risky bond funds than equity funds.
Compared to direct bond investing, investing in a bond fund will not earn you interest on the bond or your principal when the bond matures. Instead, bond funds will issue regular dividends (quarterly, semi-annually or annually) as they are invested in various bond issues and the coupon payments and maturities are not fixed. The good news is that investors have the ability to invest in bonds without being locked in until the maturity date.
Investors who choose to invest in bond funds benefit from regular income, stability, portfolio diversification and professional management. However, investors should be aware that not all bond funds have the same risk and reward profiles. The risk and reward profile is normally determined by the underlying bonds held by the fund.
For example, bonds issued by governments in developed countries are considered the least risky, while high yield bonds and emerging markets are the riskiest. Seen in this light, the yields of these risky bonds are potentially higher than those of “safer” bonds. According to Lipper (as of September 18, 2020), the average annual return of all funds in the bond fund category is 4.99%.
Having said that, there are plenty of opportunities for high quality bonds in the market. If you want to generate a higher return than fixed deposits, you should consider investing in bond funds that hold good corporate bonds.
3. Real estate investment trusts
Have you ever dreamed of owning an important historic property around the Klang Valley? Well, with Real Estate Investment Trusts (REITs) it is possible.
REITs are trusts that buy and manage real estate assets using the combined investment resources of many investors. In Malaysia, REITS are listed on Bursa Malaysia, like all other stocks. REITs offer more flexibility because you can buy and sell them easily on the stock exchange. Like stocks, the downside risk of an investment in REITs is the volatility of its prices; prices fluctuate based on market sentiment.
With REITs, you can easily own a diverse portfolio of properties, but unlike conventional properties, significant capital is not required. Instead of buying physical property, the same amount of money can allow you to invest in many types of properties in different locations using REITs. In addition, you also benefit from recurring rental income by investing in REITs. Rental rates depend a lot on the demand for the property.
It is therefore important to choose REITs that are not only well managed, but located in good locations. Remember the mantra of real estate investing: location, location, location. It also applies when you invest in REITs.
The rental income of certain SCPI sectors, retail for example, is currently negatively impacted by the Covid-19. According to Bloomberg data as of September 28, 2020, the last twelve months (last) and the estimated dividend yield for the Bursa Malaysia REITs Index is 5.1% and 4.5%, respectively.
Get the right advice before investing
Due to the low interest rate environment, many fixed deposit savers have started to explore various investment alternatives for higher returns. However, before you withdraw your money from the fixed deposit to invest, do your research and do your due diligence.
Don’t be fooled by the attractive returns promised (too good to be true). Be aware of the risk of losing your capital or worse, all of your hard earned money. This is especially critical if you are investing in higher risk investments than those I have shared previously (money market funds, bond funds, REITs).
Therefore, ask lots of questions and do your research before parting with your hard earned money. Ideally, plan before you invest. The least you can do is get a written investment plan from a licensed financial advisor so that you have a clear idea of your current financial situation.
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