142) Net Investment Return

142) Net Investment Return

 

Net Investment Return = Investment Return - Cost of Financing - Charges - Inflation - Tax

With this simple formula, to get the highest Net Investment Return is to 
a) Increase the Investment Return
b) Reduce the Cost of Financing
c) Reduce Charges
d) Reduce Inflation Rate
e) Reduce Taxes

Investment Return

To get the Highest Investment Return may need more expertise. Another factor is the Risk Level. You should be willing to take the extra risk to get a higher return. For investments, it is normal to have higher risk of losing the money, to get a potentially higher return.

If you are afraid of losing, means you are not willing to take a high risk. A lower risk investments normally will give you a lower return.

Investment Return also are reduced by:
a) initial service charges
b) on-going management fees
c) other operation fees

Cost of Financing

Cost of Financing includes opportunity cost, charges on borrowed money, etc.
Loss from Savings rate if taken from Savings account or Fixed Deposit.

Loss from:
a) Retirement Fund (€PF) returns.
b) delayed credit card settlement charges.
c) delayed loan repayment charges.
d) missed interest rate from Savings or Fixed Deposit Account.
e) other investment returns.

Other investment example:
a) start own business
b) invest directly into stocks
c) buy gold
d) buy property

Other non financial includes the joy of instant Gratification of using the money now.

Charges
Another factor is charges. To start an investment, there are charges involved. Initial charges, on-going charges and exit charges. Initial charge occurs during the start of the investment. For unit trust, it is the Initial Service charge. For Stocks, it is the charges imposed when you buy the stock. For a property, it is the legal fees, stamp duty and other initial charges.

On-going charges occurs as long as the investment is in progress. For Unit Trust, it is the management fee, trustee fee and other operating charges. For property, it is the building maintenance fees, quit rent, water, electricity, etc.

Exit charges are incurred when you sell the investment. Most unit trust funds do not charge any fees when you sell the units. However, for property disposal, you have to pay the legal fees, title transfer and stamp duty. For stocks, you have to pay the selling charges.

Take into consideration of the different charges rate for the total investment. There are times when the initial charge is low or even free, but the on-going and exit charges may be high.

Inflation
Simply put, inflation is the continuous increase of prices. Another way of looking is the same amount of money can buy less and less things.

Inflation affects the Real Return. Inflation effect depends on what the money is intended for. Different products and Services have different inflation rates.

Eg. Inflation rate for a house is different than inflation rate for tertiary or college education.

If the Investment Return is lower than Inflation, you will be worse off. Your money returns could not cover the increase in the price.

However, the inflation rate may be beyond your control. 

Tax
Tax is another factor that reduces your investment returns. Do find out if your investment returns are taxed or already net after tax. For example, distributions payout from unit trust funds are already after tax.

Capital gain from stock market and unit trust investments not taxable in Malaysia. It means the profit from.buying low and selling higher is not taxable.

Please check with your Tax Consultant on the possible tax of your investments.

Conclusion
Be aware of the factors affecting your Investment Returns. Also be aware of your actual cost of financing the investment. Do look into the charges and how they are calculated. Inflation will also affect your net returns. Tax will also reduce your investment returns.

Knowing the factors that affect the Net Investment Returns will give you an advantage to manage your money better.