From The Straits Times    |

 

Inflation’s a pain, and it’s a nagging one – every year we hear everyone complaining about how expensive everything has become. For your investments, you should always look for ways to get returns that are equal or greater than inflation.  

1. Go for mutual funds with lower or zero sales charge
Invest in mutual funds (collective investments)that expose you to different stocks. Instead of just putting your money into a single stock, you can put the same amount into a mutual fund and be exposed to about 50 stocks, at least, so you’ll be making your money work 50 times as hard.
 
The risks are also significantly lower in mutual funds. When shopping for funds, ask your fund manager to recommend the “front-end load”, or those with lower or no sales charge. This fee is deducted from your investment, and goes to the managers that sell the fund’s shares. For example, if you are investing the minimum of $1,000 in a fund with a 5 per cent sales charge, only $950 will be invested in the fund. Generally, the higher the investment amount, the lower the sales charge.
 
 
 
 
 
Other than that, funds on Initial Public Offerings (IPOs) – where the units or shares that are issued by the companies to the public for the first time – might have sales charge discounts, so keep an eye out for those.
 
 
Sometimes, banks might also offer promotional sales charges. But as with all ‘good deals’, look out for hidden costs like higher management or administrative fees. Ask about these when a fund manager offers you a mutual fund with a lower or zero sales charge.
 
2. Make use of a regular savings plan
A regular savings plan (RSP) is a disciplined method of investing where a set sum of money is debited from your bank account on a regular basis into an existing investment. By doing this, you are steadily growing your money into a significant sum over a longer term.
 
This affordable approach makes use of the principle of dollar cost averaging and takes advantage of the inevitability of the rise and fall of share prices. By putting in a fixed amount regularly, your money will buy more units when prices are low, and less when prices are high. This means that the average price you pay will be lower than the average market price – thus stretchingyour investment dollar as long as you can.
 
So by being committed to an RSP, you are potentially reducing yourvolatility risks and enhancing your long-term returns, says Paul Liu, managing partner of IPP Financial Advisers.
 
3. Reinvest your dividends
Reinvesting your stock dividends is an indirect form of RSP.  Always reinvest the dividends from your stock and fund investments, even if you enjoy receiving those mini-dividend cheques now. Usually distributed at regular intervals – monthly, quarterly, semi-annually or annually – dividends can be in the form of bonus shares, bonus units or cash.
 
The other benefit of reinvesting dividends of a mutual fund is that you will not have to pay the sales charge, Head of
sales at international fund manager Franklin Templeton Investments in Singapore, William Tan explains: "When you reinvest your quarterly dividend of $500 in the same fund, you can save on the sales charge, which is typically 5 per cent, or $25. Instead, the whole sum of $500 will be invested, earning you higher returns over time.”
 
4. Invest in undervalued stocks
The stock market can be volatile, so don’t just go for popular stocks with very high prices.  William also says, ‘buy undervalued stocks at bargain prices and hold them till the stock market improves to stretch your investment dollar.’ Undervalued stocks are stocks that are selling at prices below their intrinsic value.
 
“The idea is to understand the difference between the market price and value of the stock,” says William. “For example, if a stock is selling for $100, but can be determined to be worth $200 based on predictable future cash flow, then it is an undervalued stock.”
 
Generally, companies with undervalued stocks have qualities like a good management record, a stable earning history and a healthy financial report. Investors use the price to earning ratio, or the “P/E ratio”, to compare the value of stocks. Calculated using a company’s market price per share divided by its annual earnings per share, the P/E ratio indicates how much the market is willing to place a stake in the company’s earnings.
 
Typically, a low P/E indicates that the market does not have much confidence in the stock. But be aware this stock could be undervalued as it has been overlooked by the rest of the market. “Many investors have made money by investing in undervalued stocks.
 
Today’s investment heartbreak can be tomorrow’s star performer,” observes Paul. “So ask your financial adviser to sniff out ‘cheap and good’ stocks that will meet your investment goals.”