There was once when my brother and his bumiputera wife (now ex-wife) contemplated taking up a loan package from a local bank to invest in the ASB. I'm afraid I'm not very well versed with the exact details of the transaction, but if I'm not mistaken it had something to do with borrowing some money from the bank which is then to be deposited into ASB.
The returns from the investment in ASB is then utilised to pay the bank. The gains from the ASB investment is big enough to offset the interest charged by the bank so that the investor still ends up with a positive returns. However, it goes without saying that the gains would be smaller when compared to an investment where the investor uses his own money, since he will get to keep the entire gains from ASB without deductions to pay the bank.
The question that begs to be answered is whether this is a smart investment approach?
In the last couple of weeks, several people on my facebook friends' list have shared an interesting post about the above investment scheme. It is written in Malay, if you are keen to read more, check it out here. It's apparently an analysis by an investment analyst, although I have to admit that I haven't investigated the author's background. But even if he is not a qualified investment analystand I'm not saying that he isn'tthe post does reflect someone with some knowledge in investment.
The article goes on to analyse the investment scheme as outlined above, and then finds that in the end the bank makes more profits than the individual investor.
He then poses the question: Siapa yang untung sebenarnya? (Actually, who gains?)
And then he answers himself impressively: Bank!
A paragraph later, he poses another question: Yang rugi [?] (The loser)
And again he answers himself: Anda sebenarnya!!! (Actually, you!!!)
Therefore, he concludes, it's better to invest with your own money; don't use borrowed money to invest.
Well, I'm not an investment analyst, but I know a little bit about mathematics. In fact, a zillion years ago, when I was in school, maths was my favourite subject. But for those who really know me well, they would also know that I'm a keen observer of psychology; about people in general.
However, before I go into psychology, let me just say that I disagree with the author of the above post. The point is that a gain is a gain, and it is as simple as that! So let me give my answers to his questions based on the investment model in his article.
Question: Actually, who gains?
Answer: Both the bank as well as the investor because the latter still ends up with more (although the bank gains more)
Question: [Who} loses?
Answer: Neither, based on the model.
Now let me share my thoughts on the article as a whole. It bears no resemblance to reality! The truth is that the majority of people just don't have it in them to save up enough capital to the extent of enabling them to invest with their own money. Otherwise, there is no need for the government to establish the Employees Provident Fund (EPF) as a means of forced saving scheme.
I said majority, not all. Of course some people are the weird onesI have a friend whose father came from China before the formation of Malaysia. He started working as a labourer, saved some money, then started a small business. He maintained his lifestyle and saved every single sen he earned. When he died, he had several shops and a successful wholesale business. This is one very rare example. But for each such example, there are hundreds, perhaps even thousands more of those who couldn't do it the same way.
Most people just don't have the saving habit. An office clerk can suddenly buy a cellphone worth more than a month's salary. A fresh university graduate drives his own Kancil within the first month he gets a job. I think the Investment Analyst is just too naive in his analysis and totally disregards human nature. The reality is that most people will need to borrow moneyand yes, incurring interests for the loanto start a business, or any investment as a whole, to buy a house, to buy a car. Otherwise, they will never start a business or investment, never own a house, a car.
Borrowing from the banks is not necessarily a bad thing. You get the opportunity to open doors to realise your potential. Sure, you will have to pay interests for the loan (sorry, nothing is free), but while they make money, you too can make some money. Surely that's a whole lot better than you not making money at all?