Tuesday, June 30, 2009

Index Fund or Malaysia Stock Indics ?

You may see in below graphs that in long run, FBM30 and Hijrah are the top 2 performing indexes from 2003 to 2008 ( 5 years ).

Top 10 stocks in Hijrah index ...

Top 10 in FBM100 ...

source : FTSE
Putting all these together, what can you get out of it ?

First of all, if halal investment performance is important to you then the TOP 3 business you can invest in are :
Sime Darby : SIME 4197 $7.10
IOI : IOICORP 1961 $4.70
Telekom : TM 4863 $2.94
else, your ranked choices are :
Public Bank : PBBANK 1295 $9.05
Bumi Commerce Bank : COMMERZ 1023 $9.10
MISC 3816 $8.60
As you may see, any of the stocks above is less than $10 each. 1 lot size in Malaysia stock market is 100 units. So each of your investment transaction amount can be as low as $1,000 each.

Minimum brokerage fee $8 would apply in this case. Adding other fees like stamp duty and clearing fee, it sums up to about 1% of total stock fee. This applies to both buy and sell transactions, totalling one complete trade to 1.84%.

Each stock price may have a different 'tick' size, below table shows their equivalent percentage. You may see the actual percent loss is different in each stock depends on the price you buy. However, we can use 0.5% as the average.

Sum up the 1.84% fee and 0.53% gap loss rounds up to about 2.4%

So in comparison to investing on an index fund which charges 5.5% fee, one can also buy one of the largest business from the same index portfolio for only 2.4%. In both cases, Dollar Cost Averaging of putting $1,000 every month can be applied.

The biggest loop hole in this comparison ofcourse depends on which stock you ended up buying. The largest and best business at the moment may still under-perform as well as out-perform the index itself despite how big a portion this stock occupies the whole index portfolio. The beginning part of this article is an example of 'trying' to pick a business that can out perform the index it is in.

$8 is not always the minimum brokerage fee, other common numbers are $12 and $40. So the brokerage fee alone can be as high as 4%, in which case you shouldn't buy stock as a comparison to buying index fund with only $1,000 in each transaction.

However, in stock investment, you should also know what a MOTS (Minimum Optimized Trading Size) is. If the minimum brokerage fee is $8 or 0.1% then the MOTS is $8,000. So instead of $1,000 now we fix each of our investment amount at $8,000. That way, instead of the 1.84% stock fee, now it becomes 0.46%. This bring the total charges of buying an index stock to less than 1% !! In contrast to the 2.4% in the $1,000 example.


1. In addition to investing in an index fund, you may also buy one of the best stocks from that index portfolio. Espeically when you think you know which one will outperform the index itself. Doing so may help you save 50% of investment cost. ie. Apply Buy-Sell technique in this stock is better than doing so in the fund.

2. Investing in stock market would require a larger capital to optimize your strategy and investment positions.