Father Sez

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

Friday January 30th, 2009 by fathersez

ASB, 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 

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

2nd 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 1st 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 

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

2nd 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 1st 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.

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3 Comments for “Taking out loans to invest in ASB – is it worth it?”

by mr M
On January 31, 2009
At 9:21 pm

theres a better option. i have never really believe in banks in term of these schemes. they will always try to eat us.

let me try show another option if we just put the same amount into ASB. i would illustrate the same for both option you stated.

Option 1

1st year : Paying the same amount as if you are paying the bank. Pay RM698 per month for 12 months.

2nd year onwards: Pay the same as you are paying if youre taking a loan instalments. (ie Pay the differential between the ASB income and the loan instalments. Assume to be about RM1,400 per annum.) so 1400 per year.

After 20 years with an assumption that the interest is at 7% per year, this will translates to RM 114,822.50. 14k more than what you wouldve gotten using the bank.

Option 2

1st year : Paying the same amount as if you are paying the bank. Pay RM775 per month for 12 months.

2nd year onwards: Pay the same as you are paying if youre taking a loan instalments. (ie Pay the differential between the ASB income and the loan instalments. Assume to be about RM1,400 per annum.) so 1500 per year.

After 20 years with an assumption that the interest is at 7% per year, this will translates to RM 125,163.62. 25k more than what you wouldve gotten using the bank.

So as you can see, i would say option 3 is to just put in the money yourself without the loan. which to me is a better way, as you are not tied to the bank loan and debt free the whole 20 years.

So if you have that initial 10 percent, say 10-20k. think about it, you need only put in 100-150 per month as the options above(which is way affordable considering todays standards) and end up having 100k after 20 years. Hope this helps

On February 1, 2009
At 9:52 am

Mr. M,

Thank you for your comments. Yes, being able to save without banks would be better. Still, using the calculation of RM 8,376 the 1st year earning 7% p.a. for 20 years gives me RM 30,300. And RM1,400 a year at 7% p.a. gives me another RM 57,400 making a total of RM 87,700.

I am not able to follow your RM 114,820 example.

by mr M
On February 5, 2009
At 5:46 am

my mistake, made errors on my excel sheet. you are correct it will be around 87k. wow turning to these might actually really be an advantage provided bank interest stays. thanks for the correction

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