In Malaysia, undoubtedly Amanah Saham Bumiputera or ASB is the hottest product amongst the Bumiputeras. Refer to my previous ASB post. There are a number of strategies out there in investing in ASB. One of it is taking up ASB loan. So, is it worth it? In this post, I’ll be analysing ASB loan method. The analysis is a bit mathematical, so, bear with me. Please take note that this analysis is based on a number of assumptions. Also, please remember that as I am not an expert, this analysis is of my own and is subject to error. Consult your licensed financial adviser. Alright, that being out of the way, let’s get on with the analysis.
Assumptions:
- Loan amount: $50,000.00
- Loan tenure: 10 years or 120 months
- Interest rate: 6.25% per annum or 0.5208% per month
- ASB rate: 7% per annum or 0.5833% per month
- Inflation is disregarded
- Time Value of Money Formulas are used
- All dividend incomes are not withdrawn at all
- Interests and ASB dividends are compounded monthly
The Situation:
Ahmad Ping Pong is a Malaysian Bumiputera. He works as a circus freak earning $2000 per month. He plans to own his own circus empire in 10 years time. Thus, he needs to invest his money to realise that dream. Due to him being a conservative investor, he chose ASB as his investment vehicle. So, he sat down and did some calculations using formulas he obtained from nadlique.com :). He came up with two ideas:
Scenario 1 (ASB Loan Method)
He takes up a $50,000.00 ASB loan and invests it in his ASB account for 10 years. This is without withdrawing the dividend income at all and let it compound. He will service his monthly repayments with his salary. Here are his calculations:
Formula:
PV = loan amount
FV= amount in the future
A = monthly repayments
r = interest rate
n = time period in months
Interest rate of 0.5208% per month is used to calculate repayments.
A = Monthly Repayments = $561.39
His total payments
$561.39 X 120 months = $67,366.80
Total interests paid
$67,366.80 – $50,000 (principal) = $17,366.80.
Remember that the ASB loan was invested right away in his ASB account. Thus after 10 years, the balance will be:
ASB Rate of 0.5833% per month is used
FV = $100,479.07
Balance minus costs (interests):
$100,479.07 – $17,366.80 = $83,112.27
The balance at the end of 10 years is $100,479.07.
Scenario 2 (Monthly Deposits Method)
Ahmad Ping Pong is scared of loans. He thought that loans are works of the devil. So he decided to just deposit a portion of his salary every month instead. He will deposit $561.39 (same as the repayment figure in scenario 1) every single month for 10 years.
Formula:
ASB Rate of 0.5833% per month is used
FV = $97,165.94
So, the balance after 10 years is $97,165.94
As illustrated above, scenario 1 (with ASB loan) results in a higher balance than scenario 2. However, this is based on the assumptions given (i.e. interest rate, ASB rate and etc.). The interest rate was obtained from RHB Bank’s website. If the interest rate was higher, results would have been different. Due to the fact that the difference between scenario 1’s balance and scenario 2’s balance is not that much, higher interest costs would have made scenario 2’s method more viable. Remember, analysis would yield different results with different inputs.
If I have made an error in any way, please feel free to correct me by adding comments at the comment box below.
P.S. The above analysis is not a recommendation of either methods. Individuals need to take into consideration their own circumstances and consult their licensed financial advisers.
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