MIPs have become popular as a means of meeting pre-determined long-term needs.
Before you make any investment, it is always worth asking what your objectives are and whether they are suitable. A financial adviser can help. Or, you may like to go through a Checklist when considering the suitability of your investment plans.
A good investment plan should consider both the external and internal aspects of investing, ie the different types of investment that are available and your attitude to risk. The biggest problem nearly every investor encounters is a mismatch between his return expectations and risk tolerance.
Risk and return are generally correlated, and the longer you hold an investment the more apparent this should become. Broadly speaking, equity funds are more volatile than bond funds, and single country funds more volatile than regional or global funds. Money market funds are safer than either, but they aim only for cash-plus returns.
With an MIP there is an argument for weighting your MIP more to higher risk asset classes because of the smoothing effect of dollar cost averaging, with your investments going into the market over time. That does not mean however that you should confine your investments to only one or two funds. There is nothing to prevent you from spreading your MIP across several funds; indeed, this may be sensible risk diversification.
Because of their systematic nature, MIPs have become popular as a means of planning for specific events, like retirement or your children’s school fees. In fact MIPs may be appropriate for any kind of long-term contingency; other examples could include medical or parent care expenses.
The take-up of MIPs varies across Asia. In Korea millions of workers have instalment plans which make up significant net flows into the stock market. In Australia, Malaysia and latterly Hong Kong, which have payroll-deducted pension schemes, contributions in effect behave like MIPs; whether self-selected or managed by a third party, they get funnelled into the market on a regular basis.
Even if you do make payments into a pension scheme, the case for investing in an MIP still stands. For unlike the west, where the welfare state is well-established, Asia does not have deep coverage hence savings rates tend to be higher. But these are not always well used. An MIP helps nudge you in the direction of growing those savings in an affordable way.
What should you consider when investing? Some internal aspects to cover when establishing an investment plan:
- What are your investment goals and needs?
- How old are you?
- How strong is your financial position?
- How high is your tolerance for short-term volatility?
- To what extent do you need to be able to convert your investments into cash at any time?
- When will you need the money you have invested?
- How much diversification should you seek?
- What sort of investment style are you looking for?