4.11 Investment Alternatives to UTS and PRS
Key Takeaways
Cash and fixed deposits are low risk but generally give lower long-term returns than equities, property and bonds, and a deposit still carries some possibility of default.
To benefit from direct share investing, an investor needs enough capital to diversify across 30 to 40 stocks, the knowledge to select them and time to monitor them.
Listed REITs let small investors gain property exposure with a relatively low outlay and professional management.
Annuities provide contractual retirement income, but the annuitant bears the insurer's risk and may lose a substantial part of contributions on surrender.
In investment-linked insurance, unallocated premiums that pay agents' commissions may total up to 160% of the premium over at least six years, so early cash values are small.
Why Alternatives Matter
Most Malaysian financial assets sit in bank savings and fixed deposits, while other countries hold more in higher-yielding instruments such as unit trusts and pension schemes. As Malaysians become more financially literate, they look for better returns. A Consultant who understands the alternatives can explain honestly where schemes fit.
The Alternatives
Cash and fixed deposits
- Safe but low long-term return; most people need a bank account, and deposits range from overnight to multi-year terms.
- Low risk, but there is still a possibility of default by the institution.
- Over the long term, equities, property and bonds have historically given better real returns. Providers offer schemes for risk-averse investors who want capital security and regular income.
Direct share investments
- Popular with retail investors in the mid-1990s bull market, many of whom wrongly believed they could make quick profits.
- With limited money, investors can hold only one or two stocks, putting "all their eggs in one basket".
- Success needs expertise, time and a long-term focus on sound companies. To benefit, an investor needs enough capital to diversify across 30–40 stocks, the knowledge to choose them and the time to monitor them.
- Scheme managers bring research teams and pooled money to diversify more effectively.
Direct investment in property
- Many Malaysians have profited, but property is cyclical.
- Drawbacks: large capital, usually borrowing, illiquidity, non-paying tenants, maintenance costs, and the inability to sell part of a property.
- Listed REITs give small investors property exposure with a low outlay and professional management.
International investments
- Focusing only on Bursa Malaysia ignores about 99% of global opportunities; overseas markets add diversification.
- Hurdles for individuals: tax and regulatory barriers, currency management costs and the research needed.
- The Capital Market Masterplan envisages more specialised international schemes from Scheme Providers.
Financial derivatives
- Potential for high returns (or losses) with little capital.
- Complex; most retail investors cannot analyse or manage them properly.
Annuities
| Feature | Detail |
|---|---|
| What it is | A contract with an insurer paying a series of fixed payments (usually monthly) until the annuitant's death; each payment is part principal plus interest |
| Purchase | Lump sum, or periodic contributions over a working life; payments start at retirement or when the price is paid |
| Relation to PRS | PRS accumulates savings; at retirement a member could use PRS money to buy an annuity for regular, contractual income |
| Drawbacks | The annuitant bears the insurer's risk (returns depend on its financial health, not markets); surrender may lose a substantial part of contributions; commissions can be high |
Investment-linked insurance
- Combines life cover with investment in selected funds.
- It is mainly an insurance product. Cash value is what remains after unallocated premiums (agents' commissions, which may total up to 160% of the premium payable over at least six years), insurance charges, policy fees and fund management fees.
- Early surrender values are small; investment value builds up only after these costs are paid.
Equity crowdfunding (ECF) and peer-to-peer (P2P) financing
- Market-based financing platforms for micro, small and medium enterprises (MSMEs): ECF for early-stage equity, P2P for working capital and growth.
- Digital, lower-cost and convenient, attracting digitally savvy investors, but they finance young businesses.
Comparison Summary
| Alternative | Potential return | Term | Capital needed | Risk |
|---|---|---|---|---|
| UTS and PRS | Moderate | Medium to long | Small | Lower (diversification) |
| Direct shares | Moderate to high | Medium to long | Medium to large | Moderate to high |
| Direct property | Moderate to high | Long | Large | Moderate to high |
| Derivatives | High | Short | Medium to large | Very high |
| Cash and fixed deposits | Low | Varies | Any | Very low |
| International investments | Moderate to high | Medium to long | Large | High (plus currency risk) |
| Investment-linked insurance | Moderate | Medium to long | Small | Low to moderate |
The study guide stresses that its own comparison table (Table 4.6) is for general comparison only.
"Six Ways to Turn Savings into Investments" (Appendix 4.5)
| Vehicle | Pros | Cons |
|---|---|---|
| Savings account | Easy, low risk, flexible access | Easy withdrawals disrupt saving; low interest |
| Fixed deposit | Higher rate; restrains impulse spending | Can trail inflation; less flexible |
| Property | Forced saving; inflation hedge; good returns in booms | High initial capital; long, inflexible mortgage; hard to turn into cash |
| Life insurance | Saving plus protection; penalties encourage saving | Lower returns; inflexible |
| Unit trusts | Suits regular savers; reasonable starting amounts; dollar cost averaging; balanced portfolio managed for you; sell at any time | Affected by market ups and downs |
| Share market | Exciting; high returns if timing is right | Large capital; unsuitable for small regular sums; needs information and time |
According to the study guide, roughly how many different stocks does a direct share investor need to achieve proper diversification?
10 to 15
30 to 40
100 or more
3 to 5
Which drawback of annuities does the study guide highlight?
The annuitant bears the insurer's risk and may lose much on surrender
Annuities can only be bought with a single lump sum, never with periodic contributions
Annuities are regulated by FIMM and can only be sold by Consultants
Annuity payments rise and fall every month with the stock market
Why is the cash value of an investment-linked insurance policy usually small in its early years?
Because investment-linked funds cannot be valued until maturity
Because early premiums mostly cover commissions and charges
Because the insurer invests the first premiums only in fixed deposits
Because the SC imposes a three-year lock-in on such policies
Sections you finish are checked off in the contents.