3 Ways To Deal With Falling Interest Rates

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Central banks around the world have taken measures to reduce their respective interest rates to stimulate flagging economies due to the challenging economic environment. This record low Malaysia OPR rate, 1.75% as of July this year, has left many Malaysians blindsided with what they should do with their savings.

Suffice to say, most Malaysians have the habit of putting aside their savings into fixed deposits to enjoy the interest income. But now, what was once perceived as a safe haven to steadily grow money is mired with record low returns.

With fixed deposits no longer being an attractive option to generate good return, many people are considering alternatives. So, where can you find investment opportunities to gain an additional 1%, 2% or more returns compared to keeping the money in fixed deposit?

Here are 3 investment alternatives that can help you diversify your portfolio and generate higher return compared to money in the fixed deposit.

1. Money Market Funds

Money market basically means low risk, short term debt instruments. So, money market funds are unit trusts that invest into money market investments. Compared to other types of unit trust funds such as bond funds and equity funds, money market funds has the lowest risk. In fact, money market funds are generally considered to be the “safest” type of unit trusts around.

Money market funds invest in the short-term debts of banks, companies and governments such as commercial papers, repurchase agreements, treasury bills and as well in ringgit deposits with local financial institutions.

Money market funds offers a high level of liquidity to investors. Many investors, while waiting for better investment opportunities, use money market funds to park their short-term cash. Therefore, money market funds are generally suitable for any investors who are concerned about capital preservation and liquidity.

Since money market funds are invested into fixed deposits of banks, they are also susceptible to low interest rates. However, this perceived setback can be offset by the fund managers who may also invest into short-term bonds to generate higher returns for the fund.

The downside for investing in money market funds, like most unit trusts, is that an investor will face the risks of poor management, inflation and unguaranteed returns.

All in all, the returns from money market funds are still better compared to fixed deposit. According to Lipper (as of 18 Sep 2020), the annual average return of all funds under money market fund category is 2.37%.

2. Bond Funds

A bond is the legal evidence of a debt, normally the result of a loan. When you buy a bond, you are effectively lending your money to the issuer of the bond. The bond issuer agrees to make periodic interest payments to you and agrees to repay you the original capital in full on a certain date.

Bond funds are unit trust funds that invest into various bond instruments, such as government bonds of developed countries, Malaysian Government Securities (MGS) Bonds, investment-grade bonds, high-yield bonds, and emerging markets bonds. Like money market funds, bond funds are fixed income funds which are generally less risky than equity funds.

Compared to direct bond investing, investing in a bond fund will not give you the bond interest nor your principal back at the bond’s maturity. Instead, bond funds will issue regular dividends (quarterly, semi-annually, or annually) because of it being invested into various bond issues and the coupon payments and maturities are not fixed. The good news, investors are given the flexibility of investing in bonds without being locked in until the maturity date.

Investors who choose to invest into bond funds benefit from the provision of a regular income, stability, portfolio diversification and professional management. However, investors need to be aware that not all bond funds have the same risk and return profiles. The risk and return profile are normally determined by the underlying bonds which the fund holds.

For example, bonds issued by the governments of developed countries are considered the least risky, while high-yield and emerging market bonds are the riskiest. Look at it this way, the returns from these risky bonds are potentially higher than those of the “safer” bonds. According to Lipper (as of 18 Sep 2020), the annual average return of all funds under bond fund category is 4.99%.

That said, there are a lot of opportunities for high investment-grade bonds in the market. If you are keen to generate higher return than fixed deposit, you should consider investing into bond funds that holds good corporate bonds.

3. Real Estate Investment Trusts

Have you ever wished you can own a significant landmark property around Klang Valley? Well, with real estate investment trusts (REITs), you can.

REITs are trust that purchases and manages real estate assets using the combined investment resources of many investors. In Malaysia, REITS are listed in Bursa Malaysia, just like any other shares. REITs offer greater flexibility because you can buy and sell them easily on the stock market. Like shares, the downside risk of investing into REITs is its price volatility; prices will fluctuate according to market sentiment.

Through REITs, you can easily own a diversified portfolio of properties but unlike conventional properties, a large capital is not required. Instead of buying one physical property, the same amount of money can allow you to invest into many different types of properties in different locations using REITs. In addition, you also enjoy recurring rental income from investing in REITs. The rental rates depend a lot on the demand for the property.

So, it is important to choose REITs that are not only well-managed, but are situated in good locations. Remember the mantra of property investment: location, location, location. It also applies when investing in REITs.

The rental income for certain sectors of REITs, retail for example, is currently negatively impacted by Covid-19. According to Bloomberg data as of 28 Sep 2020, the trailing (past) twelve months and estimated dividend yield for Bursa Malaysia REITs Index stands at 5.1% and 4.5% respectively.

Get the right advice before you invest

As a result of the low interest environment, many fixed deposit savers have taken to exploring various investment alternatives to gain higher return. However, before you take your money out from fixed deposit to invest, do your research and due diligence.

Don’t get caught up over the promised (too good to be true) attractive returns. Be mindful of the risk of losing your capital or worst, all your hard-earned money. This is especially critical, if you are putting money into investments with higher risk than those which I have shared earlier (money market funds, bond funds, REITs).

Therefore, ask lots of questions and do your research before parting with your hard-earned money. Ideally, plan before you invest. The least you can do is to get a written investment plan from a licensed financial advisor so that you have a clear picture of your current financial position.

This article is contributed by Yap Ming Hui, author, columnist and founder of Whitman Independent Advisors, a licensed independent financial advisory firm which has been helping Malaysians to optimise their wealth and achieve financial freedom since 2000.