156 Regular Savings Plan 1.5 (RSP 1.5)

156 Regular Savings Plan 1.5 (RSP 1.5)

Yesterday I wrote about our normal regular savings plan (RSP), where I termed it as RSP 1.0.

Today, I am going to write about RSP 1.5 (again, I created the term)

In RSP 1.0, when an investors accumulated sum becomes very big (e.g. RM100k), the whole investment is no difference from a lump sum investment.

In lump sum investment, any slight fluctuations in fund price will have a big impact on the value of the investment. Same in RSP 1.0. The investor will feel pain when seeing value drop.

The way to avoid earned profit from getting thinner or totally gone, is to take profit. The problem with taking profit is when should we invest back or where to invest next.

When one market is good, it usually means another market is also good. So it makes no sense to come out from this fund and go into another fund especially if they invest in similar sector/industry.

In RSP 1.5, we modified the whole investing process.

We start with an regular savings plan. After three to five years when the sum get big, we will take profit by redeeming the fund and re-invest into a cost-efficient platform. To be fair to clients, the re-invest is done at zero sales charge.

The original regular savings plan will keep on running in the original platform. Repeat the redemption and re-invest process after 3-5 years or profit target hit.

In the new platform, the whole amount will be put into bond funds and money market funds.Then, we split the amount into 30 parts and re-invest into equity fund every month. Whenever profit taking target is hit, the money in equity fund will be switched to bond funds again. Repeat the whole process.

This way, an investor can take profit when market is running up and re-deploy the money into market when market drop. As the market rapidly goes up, the frequency to take profit should happen faster. Hopefully investor can be in time to get out of market before a fall, or reduce the amount bought at high price. As the market goes down, the money in bond fund can be use to buy more units to expedite the process to make profit.

As the money keep on accumulating in original regular savings plan and cost-efficient platform, the monthly investment amount also becomes higher and higher. But the risk is greatly reduced.

Actually, the ideal situation is straight way implement RSP 2.0 (explain in later article). But because of Phillip Mutual's cost efficient platform requires a monthly RSP of minimum RM2,000, RSP 1.5 is the alternative method.

To give an idea of cost difference. Example of upfront service charge, normal unit trust platform will charge service charge of 5%-6.5% (depending on the fund). In cost efficient platform, upfront service fee is 3% only.

I also have some small investment in a very famous big fund house. I find it very costly to do frequent switching there because of the high switching fee.

Whoever familiar with unit trust investing, will know one of the strategy is re-balancing of equity-bond ratio. RSP 1.5 and RSP 2.0, though not re-balancing, are methods to take profit.