Here is the corrected, albeit more complicated, method to calculate investment return of SARA 1Malaysia by investing your own RM 5,000 in cash and not withdrawing the monthly RM 134 payment until maturity. Credit goes to Peter Lim who dropped his insightful comment in my original post, An (Over-)Simplified Way to Calculate Investment Return of SARA 1Malaysia.
My gratitude also goes to Malaysia’s top financial blogger, KC Lau, for my blog post mention in KCLau.com – Should you invest in SARA 1Malaysia Fund? (where my post was featured).
Peter Lim’s original comment
I think there’s a mistake in the assumption (thus causing a mistake in the calculation and the answer).
If you invest with your own cash of RM 5,000, you either get RM 134 per month OR RM 13,000 at the end of 5 years (if you choose Not to take the monthly withdrawal), Not both.
Using the same online financial calculator, the parameters in Scenario 1 becomes much simplified, like this:
Present Value= -5,000
Future Value = 13,000
Payment at: End
Then, click on IR button. The interest rate is 21.06 percent per annum. This is the Annual Effective Rate (AER).
Now, we need to convert AER to Annual Percentage Rate (APR). AER is the interest rate when you account for compounding, while APR does not. For a crash course on APR and AER, you can refer to a post I wrote last year, Lesson 1: Annual Percentage Rate vs Annual Effective Rate – Can you differentiate?
AER to APR conversion mathematical equation (or use Conversion or CNVR function on a financial calculator) :
APR = n*[(AER+1)^(1/n) - 1], where n = number of times for intra-year compounding, and “^” represents “power of”
APR = 12 x [(0.2106+1)^(1/12) - 1] = 19.26 percent
Hence, simple interest rate = 19.26/12 = 1.605 percent per month. This is the monthly return of investment for not withdrawing RM 134 monthly.
Now, we can do a double check of our calculation above.
Total capital after 1 year = 5,000 x (1 + 21.06%) = RM 6,053
This is equivalent to:
Total capital after 1 year = 5000 x (1+ 1.605%)^12 = RM 6,053
My financial thoughts
After reading readers’ comments from my original post and KCLau’s post, it does seem to me that the workings of this scheme is quite vague to most people. For instance, the money you invested in is actually in the form of 5000 units of Amanah Saham 1Malaysia (subject to change, but what is actually subject to change – the units quantity or the price per unit?) with monthly payment eligibility if you have at least 100 units (does that mean I can sell some units within the 5 years? If not, how can an investor end up with less than 5000 units per entry price?). The units are priced at RM 1 per unit, and it does seem the price is fixed at RM 1 throughout 5 years but one reader didn’t think so. Besides, someone mentioned that we can only invest using loan, not own cash, and that single people are not eligible for the scheme.
If you have any insider information to share apart from what is stated in the official website, please drop your comments.