QUESTION
Please make comparison if i put money rm100,000 in EPF and invest with consistent return income of 6.3 % per year or i have RM100,000 and put money in unit trust return income of average per year is 10% with service charges of 3% In 7 years which is more profitable?
ANSWER
To determine which investment option is more profitable over 7 years, we need to calculate the future value of both the EPF investment and the unit trust investment, taking into account the respective returns and fees.
---
### **Option 1: EPF with 6.3% annual return**
- **Initial Investment (Principal):** RM 100,000
- **Annual Return:** 6.3%
- **Investment Period:** 7 years
- **No additional fees or charges.**
The future value (FV) of the EPF investment can be calculated using the compound interest formula:
\[
FV = P \times (1 + r)^n
\]
Where:
- \( P = 100,000 \) (initial investment)
- \( r = 0.063 \) (annual return)
- \( n = 7 \) (investment period in years)
\[
FV = 100,000 \times (1 + 0.063)^7
\]
\[
FV = 100,000 \times (1.063)^7
\]
\[
FV = 100,000 \times 1.5356
\]
\[
FV = 153,560
\]
So, after 7 years, the EPF investment will grow to **RM 153,560**.
---
### **Option 2: Unit Trust with 10% annual return and 3% service charge**
- **Initial Investment (Principal):** RM 100,000
- **Annual Return:** 10%
- **Service Charge:** 3% (deducted upfront from the initial investment)
- **Investment Period:** 7 years
#### Step 1: Deduct the service charge
The service charge of 3% is deducted upfront from the initial investment:
\[
\text{Amount after service charge} = 100,000 \times (1 - 0.03) = 100,000 \times 0.97 = 97,000
\]
So, the effective initial investment is **RM 97,000**.
#### Step 2: Calculate the future value
The future value (FV) of the unit trust investment can be calculated using the compound interest formula:
\[
FV = P \times (1 + r)^n
\]
Where:
- \( P = 97,000 \) (initial investment after service charge)
- \( r = 0.10 \) (annual return)
- \( n = 7 \) (investment period in years)
\[
FV = 97,000 \times (1 + 0.10)^7
\]
\[
FV = 97,000 \times (1.10)^7
\]
\[
FV = 97,000 \times 1.9487
\]
\[
FV = 189,024
\]
So, after 7 years, the unit trust investment will grow to **RM 189,024**.
---
### **Comparison**
- **EPF Investment:** RM 153,560 after 7 years
- **Unit Trust Investment:** RM 189,024 after 7 years
The **unit trust investment** is more profitable, yielding **RM 189,024** compared to the EPF's **RM 153,560** over the same period.
---
### **Key Considerations**
1. **Risk:** Unit trusts typically carry higher risk compared to EPF, which is a low-risk investment.
2. **Liquidity:** EPF has restrictions on withdrawals, while unit trusts are generally more liquid.
3. **Fees:** The 3% service charge on the unit trust reduces the initial investment amount, but the higher return compensates for this over time.
If you are comfortable with the higher risk associated with unit trusts, it appears to be the more profitable option in this scenario. However, always consider your risk tolerance and investment goals before making a decision.
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