Setting up your investment plan

Before you make any investment, it is always worth asking what your objectives are and whether they are suitable. A financial adviser can help.

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 generally 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 installment plans which make up significant net flows into the stock market. In Australia, Malaysia and, more recently, Hong Kong, payroll-deducted pension schemes, behave like MIPs; whether self-selected or managed by a third party, they get funneled 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. Unlike the West, where welfare systems are well-established, Asia does not have deep coverage. Hence, savings rates tend to be higher. But these are not always well used. An MIP may help nudge you in the direction of growing those savings in an affordable way.