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Young Investors

Dissecting Investment Vehicles – 4

Friday, 6 September 2013

Dissecting Investment Vehicles – 4

Security is the keyword in this fourth part of the Dissecting Investment Vehicles miniseries, where we introduce you to the more familiar Fixed Deposit, and maybe less familiar Fixed Income Security.

Fixed Deposit (FD)

A fixed term deposit (at least 3 months) in a bank for an average 3% – 4% annual return.  The minimum amount of deposit varies by bank.

Risk Level is not inexistent, but fairly low.  In Malaysia, however, the government guarantees savings up to RM250,000, meaning that in the event the bank that you save with goes into Liquidation, the government will return whatever you have saved, up to a maximum of RM250,000.  Liquidity is very low as you are not allowed to withdraw your deposited funds during the Fixed Deposit Term.  The Returns are very low compared to all other investments, in return for the higher security.  Initial Capital Requirements varies according to banks, but is usually around RM3,000.

Fixed Income Security

Mostly referred to as Bonds, Fixed Income Securities pay a fixed periodic payment, and finally the Principal (your initial investment) at maturity.  Fixed Income Securities are not that Liquid as they involve higher costs, but lower Risk Levels since you are a lender, not a shareholder, of the company.  In the event that the company enters insolvency or bankruptcy, Fixed Income Security holders will have priority over shareholders to claim company assets.

Actual Risk and Returns depend on which Bond you purchase.  It the Bond is issued by a company with bad performance (usually called a Junk Bond), there will usually be a high discount due to the higher probability of Default.  Government Bonds have lower Interest, as governments have lower probability of Default.

For example, a 5-year government Bond costs RM1,000 and pays 3% annually.  So you will receive RM30 every year, and upon maturity, you will get back your RM1,000. 

Initial Capital Requirement is generally a minimum of RM1,000 for a single Bond.  In Malaysia, however, Bonds are usually offered only to Institutional Investors as Institutional Investors are able to buy larger quantities, giving the Bond Issuer larger amounts of cash quickly.

By the Young Investors Team