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Sunday, February 11, 2007

Compare Ideal plan with unit trust

Dear Mr Tan,

What is the meaning of effect of deduction? Does it apply for both unit trust and ILP?

Based on $2,400/yr, if I invest in unit trust, assume 9% annualised gain for 25 yr period, I’ll get back $203,282.

If I invest in Ideal plan, assume 9% annualised gain for 25yr period, I’ll get back only $168,100.

The income bid-offer spread is lower at 3.5% and yet the effect of deduction is about $44,990 compared to unit trust effect of deduction of $11,200.

I’m just a layman doing the calculations. I may be wrong in my comparison.

J

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Dear J,

For the Ideal plan, the effect of deduction include the following:

* advisory fee of 15% for 3 years
* spread of 3.5% on each payment
* annual management fee of about 1%

In the case of the unit trust, you have to calculate the annual charge, trailer fee and other charges (which is more than 1% per annum) to get the comparable figure.

For example, if the unit trust has a spread of 5% and deduct 2% p.a (in annual and trailer fee), you will only get $149,250 by investing $2,400 a year for 25 years (assuming the gross yield is 9% p.a.). This is much lower than $203,282.

Tan Kin Lian

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