Capital Guaranteed Fund III

Previous posts on Capital Guaranteed Fund:
Capital Guaranteed Fund I
Capital Guaranteed Fund II

Everybody aware of inflation. Due to this animal, $100 we have after a year (FUTURE VALUE) will not allowed you to purchase a same amount product which is quoted in today price (PRESENT VALUE). Giving 5% inflation rate per annum, your $100 of FUTURE VALUE (after a year) will only allowed you buy a product which is quoted today at $86.38 (PRESENT VALUE). Thus, after a 3 years maturity period, RM 300 million of FUTURE VALUE is equivalent to RM 259.15 million of PRESENT VALUE!! With capital guaranteed capped at RM 300 million (FUTURE VALUE) after 3 years, it’s for sure fund could deliver their capital guaranteed even their investment result is poor. They are left with RM 13.21 million (RM 272.36 million – RM 259.15 million) to play around even their investment result delivered no result at all for the entire 3 years period! That’s a “SURE CAPITAL GUARANTEED, ZERO RISK” Investment!!

The calculation above is simplified to an illustration purpose. The assumption made is there is no return (0%) for entire 3 years period.



When fund tagged with “Capital Guaranteed”, it should at least preserve its fund holders’ value. This means that for RM 300 million (PRESENT VALUE), it should at least appreciate to RM 347.29 million (FUTURE VALUE) to align with its tag of “Capital Guaranteed”. If RM 300 million (PRESENT VALUE) remain as RM 300 million (FUTURE VALUE), it actually deteriorates its fund holders’ value at the rate of 5% per annum! What’s the point for investors to invest into these funds if it serves no purpose at all. After all, they could place their money into bank’s Certificate of Deposit (CD) or Fixed Deposit (FD) to enjoy “Capital Guaranteed, Zero Risk” return. Currently, a FD depositor in Malaysia enjoys 3.7% return per annum. So, with RM 300 million (PRESENT VALUE), his account balance will show RM 334.55 million (FUTURE VALUE) after 3 years. That’s almost 35% difference!

Capital Guaranteed Fund II

In Malaysia, typically fund will charge 5- 6.5% of fund’s Net Asset Value (NAV) as sales load. That means $100 you invested, only $95 - $93.5 is invested for you by fund managers. The remaining $5 - $6.5 is paid to their sales force and admin fee. Thus, by investing in the fund with same amount compared to the one, John who does it by his own, to achieve same result after a year, say 10% return of $100 investment, you need not 10% return but roughly 16% return! Table illustrates the scenario:

John $100 $110 10% annual return
You $95 $110 16% annual return

It likes a 100m race where John starts at 0m but you start at -5m and assuming both of you have similar accelerating power, who will be the winner is no doubt in question.

Second part of income generated for fund management is through management fee. In Malaysia, typical rate is 1.5% NAV per annum. Putting DUT Fund as an example, with RM 300 million at the beginning of the year, assuming there is 0% return at the end of the year, its NAV will be RM 285 million (RM 300 million – (RM 300 million * 5%)). Thus, its first year management fee would be RM 4.275 million. What’s the management fee for the remaining 2 years? RM 4.21 million and RM 4.15 million. Total management fee for entire 3 years is RM 12.64 million. Good business, isn’t it? At least for the fund management. What’s investors get after 3 years maturity? From RM 300 million at the beginning of the fund launching, investors left with RM 272.36 million (RM 300 million – RM 12.64 million – RM 15 million).

You will wonder why investors left with RM 272.36 million while at the same time, the fund is guaranteed for its capital of RM 300 million? That’s the difference occurs when we are talking about PRESENT VALUE and FUTURE VALUE.


To find out PRESENT VALUE and FUTURE VALUE, click a link below:
Financial Calculator

Capital Guaranteed Fund I

“Where there is a demand, there is a supply.”

Capital Guaranteed Fund was once a selling like a hot cake product in western world. Its popularity became less when investors there found out that its performance was not so impressive as they expected. The smart promoters shift their target to another part of world: wealthy Asian, but less educated compared to their western counterparts.

Since 97/98 Great Asian Financial Crisis, investors in Asian countries become a man after shock: any investment tagged with “Capital Guaranteed, Zero Risk” will receive a warm welcome from these investors. While for every prudent and rational investment should first preserve capital and then only look for capital appreciation, the fund promoting “Capital Guaranteed, Zero Risk” is another story.

Recently, quite of number of funds pop up with tagged of “Capital Guaranteed, Zero Risk” in Malaysia to lure investors. Let’s look at how 1 of the fund structures its “Capital Guaranteed, Zero Risk” product.

NTD launched its RM 300 million DUT Fund. The fund is an offshore fund with capital guaranteed feature. Investors who buy DUT Fund must starts with initial investment of RM 5,000. The fund is for 3 years maturity, where the capital is guaranteed after 3 years period while at the same time, POTENTIALLY GAIN from any capital appreciation. 85-90% of the investment would be placed with a negotiable investment deposit to ensure capital return guarantee and invest the remainder in 5 regional indices, namely, South Korea, Japan, Australia, Taiwan and China. To entice investors, the promoters show their back-test that over past 3 years, these indices appreciated at the rate of 34% per annum. Without deep thinking, everything seems great, isn’t it?

Woodpecker and Snake

Woodpecker builds his nest above pines tree. You may wonder why pines tree but not other type of tree? There is a reason behind it. Snake is a predator of the woodpecker eggs and it seems it is easy for snake to climb the tree to catch the eggs. In order to protect his progeny, wood pecker must select a place where he can safeguard his progeny. Pines tree secret resin, which is an irritant to snake. Whenever snake tries to climb over tree to catch the eggs, he would end the up with a failure. This is because whenever snake climbs the tree, along the way, he would suffered from an irritation from the tree resin. Because of the irritation, the snake will fall down from the tree half way before he manages to catch the eggs. That’s the smart way of woodpecker to protect his progeny.

In the investment world, the naïve investors are similar to the greedy snake. Whenever there appears an “Once in a life time opportunity”, they will flooded to it. The promoters of the “opportunity” definitely will tell the investors how lucrative the investment and best of it, it appears “Zero Risk, Capital Guaranteed”. In order to lure the investors, they will equipped with big titles such as managed by world renowned fund managers, backed with hundred years history banks and so forth. Because the titles are so big and glamour, the investors entrust their money and invest to the so called “Zero Risk, Capital Guaranteed” investment. Keep in mind that the hundred years history bank does not equivalent to hundred years of successful fund management. If you really look deeply, you will find out that the bank nowadays acts more like a financial supermarket: they sell you everything, from A to Z. Housing loan, business loan, credit cards, machinery leasing, mutual funds….etc. When you really examine their performance of the fund they promoted, it seems that majorities of them not only do not preserve the capital of the investors but deteriorate it. While the objective of the investment should always be first preserve the capital and second for capital appreciation, they deliver the opposite result. When asking why they deliver such poor result, they will blame to external factors such as high fuel cost, Tragedy 9-11, financial crisis and so forth. Seem that their poor performance is none of their business. True, those crisis and negative events happens all the times: in the past, present and for sure it will continue in the future though the theme might different, so are these fund managers telling you that the fund performance will continue perform poorly in the future? If so, why selling the funds promising the investors how good the potential return in the first place? Why they still enjoying handsome paid while fund continue perform poorly?

To be a snake or woodpecker is your choice. To be a snake looking for quick and easy profits is dangerous. After all, life is never easy. Life is not a story book, it is a reality.

Technorati Tags: Investment, Mutual Fund, Unit Trust, Woodpecker, Resin, Pines Tree, Zero Risk, Capital Guaranteed, 9-11

Choose the correct information

In the era where we are bombarded with ton of information, carefully choose the correct information is crucial. After all, bits and bytes of information can be more dangerous than ignorance.

Once upon a time, when the information is hardly obtained by an ordinary people like us, we treat the information we obtained like precious metal. We absorbed what ever we could in the hope that we become more knowledgeable. While this is a correct attitude for the improvement of humanity, this only applied to the society where the information is scarce. When the situation changes, where we could easily obtain whatever information that we wish as long as we connected through the internet, choosing the correct information becomes crucial. This phenomenon is similar to the society who lacked of food, and making them no choice to choose what the food they wish to put inside their stomach.

Very often, by absorbing the misleading information, either consciously or unconsciously would only bring the devastating result to us. Take the example, whenever a company announces its profit soaring in a particular quarter, do not be so excited and thrush your money into it. The reported earnings lie to its word “reported” and whether it is “real” earnings, only god knows. Simply by Creative Accounting, the management and its related interested parties could manipulate the company account and show the public a “soaring reported earnings”. There are too many ways for the manipulation, by cooking the book, by selling off the assets to boost one-time earning, by dealing business among related companies are among few examples of the manipulation. The only way to be a successful investor lies to your passion and your home work – no short cut.

Over the years, I found out that the asian investors are the lambs that become the prey of the fox of financial industry. The information that is out of date and no longer applied in the western world could be sold in asian countries. Take an example, after 97/98 Asian Financial Crisis, many asian investors isolate themselves from the stock market. Because of the cash piling up, they need to find a way to invest their cash pile. Where the market would always supply what demand needed, the financial industry came out with the “Capital Guarantee Fund”. These hungered investors pouring their hard-earned money into the funds. Other examples like “Buy and hold”, “The price of real estate is always appreciate in the long term” and “Blue Chips counters is a safe haven for the investor”. There are too many examples that show that people without a proper knowledge tend to become the prey. While ignorance people have no choice but become a sacrifice, the most pitiful people are the one who obtain misleading information and yet they feel they got the correct information.