How to compare and determine FD structured product really gives me 6.88% return?

So today I want to share with you a question Esther (not her real name) ask me about 3 weeks ago. Let me attempt to compare and determine this FD structured product can really give a 6.88% return

She asks “Is this product PRUSignature proposal worth investing in?”

I ask her back “What is worth investing for you? What is a particular return you are looking for?”

She said “Good question! I never thought of that. I guess any return higher than FD”

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Esther is someone conservative

You see Esther is someone conservative. She is 1 of the 1586 Malaysian women in the age group between 40-44 who has RM 1 Million in her EPF account.

Here is an excerpt of the email sent to her by Jojo (not her real name) her Relationship Manager from S Bank. The summary of the product is 

Here is the 1st option simulated by Jojo. Notice she mention 6.68% for 6 months and projected for 6 months only instead of 1 year. But here she projected for 1 year which I doubt S Bank will pay. (updated as of 25th April 2022)

Here is the 2nd option at 4.28% You can see although the FD interest differs significantly, the UT return is projected the same at 8% for both options.

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What is the real return of the Fixed Deposit?

Here is the proper calculation for option 1 compared to option 2 specifically for Fixed Deposit. I found the FD rate for the subsequent 6 months offered by S Bank at only 1.5% (Updated as of 25th April 2022, thanks to c*********@gmail.com highlighting the correct calculation)

Did you notice when you do a ‘apple to apple comparison‘, you can see much clearer? The 6.68% for 6 months, when compared to 4.28% for 1 year, makes 50+% lesser return. makes a slightly lesser return although the 6.68% is so much greater than 4.28% (updated as of 25th April 2022)

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But wait, what will the returns look like combined?

Next, you must be wondering what your return would look like when you put the FD + Prulink Innovation Fund together. But let’s take a look at Prulink Innovation Fund whether the 8% projection is appropriately projected.

As you can see, Prulink Innovation Fund is a ‘feeder fund’ to the ‘target fund’ – BlackRock World Technology Fund Class i2 USD. It charges a 1.5% yearly fund management fee which typically looks cheaper compared to other ‘feeder funds’. I have seen others charging up to 1.8% per year. But you will be also wondering what are they ‘value adding’ since they don’t do anything as 100% of the fund is channelled to the ‘target fund’ – BlackRock World Technology Fund Class i2 USD. I am curious too.

Something we don’t see normally

A quick check via google, I manage to download the February 2022 monthly fund fact sheet. This fund is quite interesting. Here are some key points.

1. The minimum investment directly into this fund is USD 10,000,000 which most retail investors won’t be able to participate. Wholesale funds that I have seen meant for High Networth (someone who has USD 1 Million net worth minus his primary residence) and Affluent investors (someone who earns RM 300,000 gross income annually or RM 400,000 gross income combined with spouse) typically start at RM 100,000 in Malaysia. Obviously, this is an even higher level than that.

2. You can see the Top 10 holdings are invested into technology companies. Most of these companies are very reputable, well known companies like Apple, Microsoft, Alphabet (which owns Google), Tesla, Amazon and Nvidia.

3. When you look at the returns, the fund has been registering 47+% return in 2019, 71+% return in 2020 and 17+% in 2021 which is in excess of the 8% projection by Jojo. 

4. Looking at the annualized return for the past 3 years, it is well above the 8% projection as the fund registered 26+% per year. (Again, we should not rely on past performance as an indicator for future returns) But in the shorter term, it has been registering negative returns for the 1 month, 3 months, 6 months and Year To Date (YTD) return which is quite consistent with most of the funds and market due to the war tension between Russia and Ukraine.

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So, what does all this mean?

So what does all this mean? Let’s digest by combining both the FD & UT and see what is the return Esther potentially can get. (Updated as of 25th April 2022, thanks to c*********@gmail.com highlighting the correct calculation)

If you notice, both returns do not differ greatly. Mainly due to the similar projection of 8% on the Prulink Innovation Fund. So interestingly, if we just look at the original return of

1. Option 1 – 6.88%, it turns out the compounding return is closer to 5.28% 5.48% (updated as of 25th April 2022)
2. For option 2 – 4.28%, the compounding return is 5.5% 

Conclusion

Can you see how misleading it can get by just deciding with our ‘gut-feel’? Of course for Esther, when she sees the return being higher than FD, she was quite keen to invest. I then ask her these additional questions before deciding.

Q1) Although this return is higher than FD, are you able to tolerate the risk of a UT? (Essentially 100% of the funds are invested into UT, especially after Year 2)

Q2) Are you able to tolerate the PRULink Innovation Fund risk ? Essentially all your RM 90,000 will eventually be invested into the UT fund? Did you realize the FD was more of a camouflage?

Q3) Can you find any other investment to grow your funds higher than 5.5% with less risk? 

To her delight, she answers Question 3 with a reassuring YES. She said EPF. 

Of course, for someone who can tolerate higher risk, perhaps this proposal sounds great as the BlackRock fund looks promising on paper. Potentially it can get a higher return than 8%, the overall return will improve significantly. Again, do your own research and understand your current financial situation to make better money decisions

Simplifying Money For You,

Ka Hoe

P.S If you want a tool that can help you ‘SEE’ your current financial situation in 5 minutes, click HERE

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*DISCLAIMER – All my sharing here is for educational purposes & my personal opinion. It should not be confused with financial advice. Different individuals have different scenarios & different needs. Do email me personally about your personal circumstances. As for all the products discussed here, it is not a recommendation whatsoever. You should do your own due diligence before investing. I am not affiliated with the product providers for writing this article & I do not receive any remuneration nor commission to write this article.