ASB Financing – how does it work?

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Ages ago, I wrote a post briefly talking about ASB loans, and how they work, some people found it useful, so I thought I’d reproduce it here.

One of my earliest tasks when I first started working as a personal financial consultant was to promote the ASB loan to prospective bumiputera clients. The product, offered by several banks in Malaysia, allowed bumiputeras to borrow money to invest in a fund called the Amanah Saham Bumiputera (ASB).

Before going into detail about how the loan works, and what it can do for you, let’s take a quick look at the ASB fund. The fund first launched on the 2nd of January 1990 and invests in a mixture of equity and other asset classes. The ASB is a fixed price fund aimed to generate income for unit holders whilst ensuring the preservation of capital. This is a great option for people who are a little on the risk averse side.

Investing in the ASB is simple, investors can open an account at any Amanah Saham Nasional (ASNB) offices or agent banks, with an initial investment of ten ringgit. Any top-ups after will only cost you one ringgit. The maximum deposit is two hundred thousand ringgit, but dividends can be reinvested and left to compound for as long as you want.

Okay, so ASB financing is essentially borrowing money from the bank to invest in the ASB. The idea is that, instead of putting in a monthly deposit of say, RM200 ringgit into the ASB, why don’t I borrow RM20,000 lump sum from a bank, and pay about RM220 in instalments for the next 10 years instead? That way, I can build up my returns faster than saving RM200 every month.

How does that work?

Okay, assume that ASB pays 6.5% in dividends on average, if I save RM200 at the end of every month for the next 10 years, and leave my dividends untouched (to fully realise the magic of compounding!), I will have roughly RM33.6k saved up. For now, I’ll talk about how it works, and I’ll show you how I calculate my numbers in later blog post, if you’re interested.

Right, now let’s say I took out a loan instead, and within my budget, I can afford about RM200 a month for my instalment. Assuming an interest rate of 5.45% charged by the bank, I can borrow RM20,000 for 10 years, with an instalment of RM216 a month (okay, RM16 extra, but I’ll probably manage, after tweaking my budget). Again, assuming ASB returns of 6.5% on average over the next ten years, and leaving my dividend to compound, by the end of my loan tenure, I would have accumulated RM37.5k. The difference is about RM3.9k, or about 10% more in returns, which is pretty decent.

Now, in order to really use this to your favour, you should think about maximising the amount borrowed based on how much you can afford to set aside monthly. Again, using RM200 as a rough measure of what I can afford, and extending my loan tenure to a maximum of 30 years, I can borrow RM40,000. Assuming an interest rate of 5.45% per annum, my monthly instalment comes up to about RM225 a month, higher than the RM200 that I budgeted for, but that’s okay, maybe I can adjust my budget somewhere.

So, now, let’s see how they stack up: between saving RM225 for the next 30 years, against borrowing RM40,000. At the end of 30 years, if you saved RM225 each month, and left the dividends to compound, you’d end up with roughly RM249 thousand. If you borrowed RM40 thousand, you would end up with RM265 thousand after 30 years. That’s RM27 thousand extra, or just over 10% more. Still pretty good!

There you have it, the end results between investing your own money and borrowing to invest in the ASB can be quite substantial. I know that some people might be a little hesitant in wanting to take out a debt, but not all loans are bad, some can be quite productive, and the ASB loan is one of those examples. The key to making the ASB loan work for you is discipline. If you treat it as a long term ‘forced’ savings plan, you’ll be okay. Try to leave the dividends untouched for as long as possible and let the magic of compounding returns do its work, you’ll definitely reap the rewards later on.

If you decide to take the ASB loan, or to set aside an amount each month, you won’t go wrong, either way you would still be building a good amount of savings which will help you in the long run.

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