Never too early for financial planning
A survey of tertiary students has shown over three-quarters are clueless about investment options available. CHUA SI MIN, TOR SHI TING, WONG HAN YEE and KONG YOON KEE provide some pointers
IN THE MoneySENSE National Financial Literacy Survey 2005, almost all respondents indicated the importance of starting financial planning early. But the fact is, 17 per cent of them had not started. The survey also found that 17 per cent of respondents believed the best time to start financial planning is during school - yet only 9 per cent of them do so.
To find out why, we conducted a survey of tertiary students.
The 'save' choice
When it comes to planning their finances, most tertiary students can only think of the 'save' choice. Although 76 per cent of our survey sample do not invest, 78 per cent have a savings account. A majority of them put aside less than 10 per cent of their monthly allowance.
At an interest rate of 0.25 per cent, $1,000 in a savings account will turn into $1,002.50 at the end of the year. However, if inflation is at 5 per cent, it would reduce one's purchasing power as the savings interest rate is less than the rate of inflation.
Investing fares better, if one can find investments that offer returns higher than the inflation rate. Many students in the survey knew about the huge potential returns involved in investing, but a large majority do not invest. The two most common reasons for not investing are 'lack of financial knowledge' and 'lack of funds'.
In other words, tertiary students want investments that are affordable and easily manageable. Here are some options.
The Regular Savings Plan (RSP) and unit trusts
RSP allows you to invest a small amount of money, usually monthly, in a fund. The minimum monthly amount starts from as little as $100. There are a few RSP routes but the simplest would be through unit trusts. In a unit trust, your money is pooled with that of other investors and invested in a portfolio of different assets by a fund manager.
Among unit trusts, specialised funds and global equity funds typically manage higher returns at higher risk. Balanced funds carry moderate risk while bond funds and money market funds provide lower average returns at lower risk.
Investing in unit trusts reaps diversification benefits. By spreading your money among different investments, risk is reduced. On average, they provide higher long-term earnings than savings accounts or fixed deposits. Unit trusts can be redeemed any time without incurring penalties. They are managed by professional fund managers and are a good starting point for tertiary students lacking knowledge in direct investment.
Bonds: Singapore Government Securities (SGS)
SGS bonds are marketable debt instruments issued by the Singapore Government through the Monetary Authority of Singapore (MAS). They pay a fixed rate of interest every six months, and the principal is repaid on the maturity date. The minimum denomination is $1,000.
SGS bonds are safe investments as they are guaranteed by the government and investors can lock in a fixed interest rate - typically higher than savings interest rate - over longer periods. They can be sold easily prior to maturity, unlike fixed deposits. However, investors face a price risk if they sell prior to maturity.
Stocks
Share investors earn a return via capital appreciation/depreciation (from share price increases/falls) and dividend income (periodic payments by the company that are not fixed and can be zero).
Investors seeking high capital appreciation typically seek out profitable firms that pay low dividends, as these firms plough back earnings to expand the company rather than pay them out as dividends. These tend to be the riskier stocks. Investors desiring regular income tend to invest in lower- risk, higher dividend-paying stocks. The choice depends on one's objectives and risk appetite.
Stocks are considered riskier than bonds because their returns are more volatile. If you hold stock from a single company, your risk is not diversified. Successful stock investing requires intimate knowledge of the stocks one invests in.
Supplementary Retirement Scheme (SRS)
With the SRS, the government hopes to encourage Singaporeans to save more for their old age by means of voluntary contributions to their SRS accounts, which enjoy certain tax benefits.
Participants can contribute a varying amount to an SRS account (subject to a cap) at their own discretion. These contributions may be used to purchase various investment instruments. Each dollar of SRS contribution will reduce income chargeable to tax by a dollar. Investment gains will mostly accumulate tax-free in SRS. Tax will only be payable when you withdraw your savings from your SRS account. Furthermore, if you withdraw your savings upon retirement, only 50 per cent of the savings withdrawn will be subject to tax. You may also spread your withdrawals over a period of up to 10 years to meet your need for regular income. Spreading out your withdrawals will generally result in greater tax savings.
Take the initiative
According to our survey, the most important reason cited for not investing is lack of knowledge. But there are plenty of information sites - and even tutorials - to guide you step-by-step on how various investment tools work. If you are still clueless, MoneySENSE (www.moneysense.gov.sg) supported by MAS, is a credible site to browse. There are also many financial advisory firms with websites to educate you on the basics of investing and how to invest in unit trusts. Just make sure you do your research thoroughly before taking the plunge.
Chua Si Min, Tor Shi Ting and Wong Han Yee were final-year banking and finance students at the Nanyang Business School when they wrote this article. Dr Kong Yoon Kee is a lecturer at the school's banking & finance division.
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