Wednesday, July 7, 2010
Cheapest Way to Invest (Part 2)
Last month, I wrote a very quick and dirty post on the Cheapest Way to Invest. This post has also been published at CPF's IM$avvy site.
In the previous post, I outlined that the cheapest way to invest is probably a "wrong" question. Instead, the question should be posed as follows:
1. What investment incurs the lowest brokerage charges, sales charge or commissions?
2. What is the cheapest form of investment (cheapest in the sense of lowest monthly premium committment or lowest initial capital outlay)?
Lowest brokerage charges, Sales charges or commissions
There is no easy solution to finding a good investment with low brokerage charges, sales charges or commissions. Afterall, people who sell investment products need a way to make their living and very often, these people are compensated based on the amount that the customer invests.
As a rough guideline, the charges one should expect to pay for investing in shares should be around a minimum of $20 to $30 per trade (depending on the size of the trade). If the amount you are buying or selling is larger, the brokerage charges are actually a percentage of the amount. For lowest brokerage charges, do shop around in Singapore for the lowest charges. Carrying out the trades by yourself through the internet is often cheaper than getting the broker to carry out the trade for you.
For investments into funds (e.g. Fundsupermart or investment linked plans), the norm is a 5% sales charge. Over the years this has been reduced and some funds are now offering sales charges for as low as 1% or even promotional rates of 0.2%. One needs to understand that the sales charge is the difference between the bid-offer spread of the fund prices. Some platforms or companies also charge an annual ongoing fee based on your investment amount. This means that the larger your investment amount, the larger the ongoing fee. Take for example an investment of $10,000 into a fund with a 5% sales charge. That basically means that your investment amount is reduced to $9,500 almost immediately upon investing into the fund.
Commissions are paid out to insurance agents/financial consultants/relationship managers/financial planners/brokers/etc whenever they make a sale of an insurance product. In today's context, many investment products are now tied in with insurance and the insurance companies pay a distribution fee to the agents who manage to sell the products to customers. This distribution fee is the commissions that are paid out as wages/commissions to the various levels of people in the insurance company.
Whatever the case, it is always good to source around for the lowest charges. However, it is also important to note that such charges are hard to escape from and there will definitely be charges to pay. Take a look at the Benefit Illustration for products from insurance companies to make the comparison.
Lowest Monthly Premiums or Lowest Initial Capital Outlay
Based on what I know, $100 is usually the lowest monthly premium for any regular investing/savings plan. However, it is not uncommon to see endowment savings plans that allow you to commit as little as $50 per month. Philips also has a ShareBuilders Plan that allows you to buy certain blue-chip stocks on SGX for as little as $100 per month.
For investment into funds, the usual minimum investment amount should be $1000 though it is not uncommon for some to have investment amounts of $5000.
MAS does not regulate certain investment products so the consumer has to beware when investing in the following:
1. Land Banking
2. Oil pods
3. Wine Investments
Others like ponzi schemes and multi-level marketing are also investments which consumers should take note of. I did not include these products into this post because I feel that they are not really worth the risk. You make your own call =)
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