Sunday, April 27, 2008

Monthly income plan

Dear Mr Tan
I have been offered the following "Monthly Income Plan" by my bank, marketing for a life insurance company:

Initial Investment - 10 K @$1
Front end load : 5 %
Annual fee : 1.25 %
Initial investment: 9,675 units
Monthly pay out coupon : App. $38 for 11 months and app $58 for 12th month. Total amt received per year : $476.

How to sell : relationship manager (RM) told me that just fill up the form. based on current market price and I can sell. eg of current unit price is 99 cts., from the statistics , it is as low as 87 cts.

My initial thought is that I wanted to invest 10 K. My concern is that after investing, I will only get my return after 3rd year, and RM may continue to ask me to make further investment.


I believe that the annual payout of $478 (i.e. 4.78%) is not the actual income earned on the investment, but is a withdrawal of your initial investment. You have to check this point.

I dislike this type of complicated structure as it is confusing to the investor. Never trust anything that you do not understand.

You can read this FAQ on the charges for an investment linked fund:

For a single premium ILP, the upfront charge is usually between 3% to 7%. The charge of 5% is at the average level. The annual fee of 1.25% is reasonable, provided that the fund is largely invested in equity. If it is invested mostly in bonds or money market funds, the fee should be less than 1%.

I find all ILPs to be expensive. It is better to invest in a ETF such as the STI ETF managed by StateStreets. The upfront charge is only 0.3% (ie the brokerage that you pay to the stockbroker).

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