QUOTE(poolcarpet @ Mar 8 2013, 01:14 PM)
Ok, I was just thinking about this... most will put in RM3k into SSPN in order to take advantage of the tax relief, and gain up to RM780 in 'instant' returns, correct?
I just quickly created an excel with simple calculation,
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and let's assume we only look at 1 year investment return (because year 2-year n is just a repeat of this year 1 investment),
RM3k put in SSPN and RM3k-RM780=RM2220 put in another investment.
Over 17 years, if I can get consistently 2% higher return rate than SSPN dividend, I actually end up with MORE money at the end!
Is my calculation correct or am I missing something here? Anyone understand what I'm trying to say here?
First I use Excel to do the calculation.
I pull it for 17 years.
Under column 1: I put in a figure of RM 4,400.00 i.e., RM 6,000.00 less 26%. This means your actual capital is RM 6000.00 - less 26% = RM 4,400.00
Under column 2: I put in a figure of RM 6,000.00 because this is the actual amount put into SSPN every year for the next 17 years consistently.
Under column 3: I key in the formula =Column 2 x 1.04 because I assume SSPN will give a dividend of 4% consistently throughout the whole 17 year tenure.
I repeat the process until I get 17 rows i.e., 17 payment periods.
What I get essentially is:
i) PV = 0 since I start accumulating from zero value
ii) FV = RM 147,872.48 i.e., the total accumulated future value inc dividend reinvested.
iii) N = 17 i.e., 17 years tenure.
iv) PMT = RM 4,440.00 i.e. the actual capital outlay per period of time
v) Mode = End, since the dividend is paid at the end of the period.
From all the 5 parameters above I am able to calculate I, i.e. the Internal Rate of return for this series of investment using a financial calculator.
And from my calculator, the IRR (I) = 7.85% p.a.
Taking into a/c the tax savings, this SSPN saving vehicle is able to give a return of 7.85%p.a.
Can you compare SSPN rtn with an equity unit trust rtn in a direct way? The answer is no.
Because another component we have to take into a/c is Risk adjusted return.
For SSPN, I'll say its volatility or standard deviation from mean (the measurable parameter for riskiness) is very similar to money market fund i.e., around 0.1%
For an efficient unit trust, the usual standard deviation from mean is around 8% and a typical long term rtn is around 10% p.a.
So, let's compare the risk adjusted return of SSPN vs a efficient equity unit trust.
SSPN = (7.85 - risk free rate)/standard deviation = (7.85 - 3.1)/0.1 = 47.5 where the risk free rate I take is the current retail 12Mth FD rate
Unit Trust = (10 - 3.1)/8 = 0.8625
So if that is the case, does that mean we should dump everything into SSPN?
The answer is no, because SSPN tax benefit stops at RM 6,000.00 p.a. So it is not enough to accumulate for a child education.
However, SSPN plays a volatility reducing role in your overall portfolio for your child education.