Friday, March 21, 2008

Compound Interest in Unit Trust Investment

No matter where you put your money, provided the money is still yours, compound interest will work for you. Consider the following places where you save your money

under your pillow - compound interest still works, but with 0% interest rate.
in saving account - compound within 1-2%
in fixed deposit account - compound 3.7% p.a.
in unit trust - compound with a wider range, say -5% to 20%
in shares - compound with an even wider range, say -50% to 100%
in properties - hard to predict.

If you buy a house that’s never completed, you lost your capital plus interest charges of your mortgage. However, some experienced property investors can get their money compounded many fold per annum.

But if you spend the money instead, I guarantee that compound interest won’t work for you anymore, because the money is no longer yours.

You can even use borrowed money to invest. For instance, you get a home loan to buy house, or borrow money from your parents to invest in stocks. If you manage to get a higher return than the interest charges, compound interest is working for you.

But if you borrow money to spend, compound interest is working against you. The harder it works, the poorer you are.

In order to let compound interest works its wonder in unit trust investment, you should:

Never repurchase your fund unit - let your capital stays in there as long as possible. When you want to lock the gain from time to time, use switching facility.

Review your portfolio performance regularly - make sure it is giving you positive return as often as possible

Invest as early as possible - start investing when you are still young. It will give you the longer term to invest and get through all the equity roller coaster ride when you reap the return at the end.

Invest as much as possible

Never get tempted to spend your earning - just leave your return in the fund. Forget about it! Leave it until you reach your financial freedom.