### Taking out loans to invest in ASB – is it worth it?

Friday, January 30th, 2009ASB, which stands for Amanah Saham Bumiputra, is part of the Malaysian Government’s efforts to alleviate the financial standing of Bumiputra’s. ASB is in the form of a unit trust, except that the principal is guaranteed by the Government. The scheme also pays relatively generous dividends, 8.55%, 9.00% and 8.75% for the years 2006, 2007 and 2008 respectively. This dividend is made up of a dividend portion and what is called a bonus portion.

Recently a friend asked me if it was worthwhile to take out a loan (which some banks readily give) to invest in unit trusts? This is an interesting question. I have always been a great fan of this opportunity. In fact, I have always told the younger Bumiputra staff in the organisations that I have worked for that this ASB scheme should, in fact, be one of the best schemes in the world.

Some banks give 100% ASB loans with a MRTA thrown in. The spreads between the interest paid on the loans and the dividend income can vary. If one does not take out the dividends and bonus earned and there is a negative spread of, say, 1.5% between the income and the repayment (principal + interest) outflow, the ball park computations would be as below for the two most likely possibilities:

ASB Investment: RM100,000

Tenure: 20 years

Interest Rate: 7% p.a.

**Option 1**

Paying 10% downpayment and borrowing RM90,000.

Monthly payment for loan: RM 698 per month

1^{st} year : Pay RM698 per month for 12 months.

2^{nd} year onwards: Pay the differential between the ASB income and the loan instalments. Assume to be about RM1,400 per annum.

To get RM100,000 at the end of 20 years (which is what you would get), your 1^{st} year payments and the yearly differentials would have been *compounding at a rate of almost 8% per annum.*

**Option 2**

Borrowing 100%, i.e. RM100,000

Monthly payment for loan is : RM 775 per month

1^{st} year: Pay RM 775 per month for 12 months

2^{nd} year onwards: Pay the differential between the ASB income and the loan instalments. Assume to be about RM1,500 per annum.

To get RM100,000 at the end of 20 years (which is what you would get), your 1^{st} year payments and the yearly differentials would have been *compounding at a rate of almost 7.5% per annum.*

These are rates of returns that should not be sneezed at. Discipline would be needed for not withdrawing the ASB dividends and for making the yearly differential payments. But then is there any investment that doesn’t call for discipline?

I think it is a great opportunity just for the taking for so many of the Bumiputras in our country. Lots seem to have been written about the pros and cons of taking a loan to invest in ASB. My view is based on what we pay as opposed to what we get.

The only negative may be inflation. At the end of 20 years, the RM100,000 may not have the same purchasing power as RM100,000 today. But then this problem is applicable for EPF savings and almost every other kind of savings.

Unlike in the US, where they have inflation adjusted Treasury Bonds.