All these while, I thought that capital gains from the sale of shares or financial instruments will not be taxed by IRAS. However, if you look closely at the IRAS website, it states that the gains may be taxable if the individual is trading and that depends on the frequency and volume of transactions and the interval between the purchase and sale. Well, if you are investing, you are not likely to fall under this category since the holding period of the shares will be rather long. On the other hand, those who do trading are more likely to fall under this category. Another disadvantage besides the expenses incurred for brokerage charges due to the frequency of trades.
If you are or you have kids who will be entering university soon, you should take advantage of the interest free study loan and tuition fee loan and use the funds to invest. The returns that are generated can be used to offset the cost of a university education slightly.
Fresh undergraduates who will be entering into any of the 3 local universities which includes NUS, NTU and SMU are usually able to take a tuition fee loan of up to 90% of their course fee. Depending on the selection of course, it ranges from around $6500 for most courses such as Engineering or Science to slightly less than $19,000 for medicine. Subsequently, they may be eligible to take up a study loan that can pay for the remaining 10% of their course fee and a living allowance of $3,600. For most courses, this means that the recipient can receive up to a potential amount of at least $10,000. Throughout the entire course of study, interest will not be charged on the loan amount. As such, if you have enough funds to pay off the tuition fee, my suggestion is that you should not pay it off straightaway but keep it to generate some returns and try to get the study loan too.
Let us consider an example. An undergraduate will be entering into an Engineering course in NUS soon and he is able to secure both the tuition fee loan and study loan. The undergraduate has enough funds to pay off the tuition fee but he will be taking up the tuition fee loan and the study loan. Currently, the course fee for Engineering at NUS is $6,620. Taking into account of the study loan, he will be receiving a total of $6,620 + $3,600 = $10,220 at the start of each year for the entire course of study. Since the preservation of the tuition fee is of utmost importance, the funds that he has received will be invested in a principal guaranteed or risk-free investment such as SGS bonds, structured deposits or fixed deposits. For the sake of illustration, we assume that we are able to invest the funds yearly with a return of 1.0% per annum.
Year 1
Amount received = $10,220
Interest received at end of Year 1 = $10,220 x 1%
= $102.20
Total amount at the end of Year 1 = $10,220 + $102.20
= $10,322.20
Year 2
Amount received = $10,220
Total amount at beginning of year 2 = $10,322.20 + $10,220
= $20,542.20
Interest received at end of Year 2 = $20,542.20 x 1%
= $205.42
Total amount at the end of Year 2 = $20,542.20 + $205.42
= $20,747.62
Year 3
Amount received = $10,220
Total amount at beginning of year 3 = $20,747.62 + $10,220
= $30,967.62
Interest received at end of Year 3 = $30,967.62 x 1%
= $309.68
Total amount at the end of Year 3 = $30,967.62 + $309.68
= $31,277.30
Year 4
Amount received = $10,220
Total amount at beginning of year 4 = $31,277.30 + $10,220
= $41,497.30
Interest received at end of Year 4 = $41,497.30 x 1%
= $414.98
Total amount at the end of Year 4 = $41,497.30 + $414.98
= $41,912.28
Total amount received = $10,220 x 4
= $40,880
Return on investment = $41912.28 - $40,880
= $1,032.28
Percentage reduction in tuition fee = $1032.28 / ($6,620 x 4)
= 3.9%
From the above calculation, it can be seen that the funds can be used to offset the tuition fee by 3.9% using a investment return rate of 1.0%. I do think it is possible to get a higher interest rate of slightly above 1%. Although the amount saved is not a lot, this offset of tuition fee seems to be 'free' as all we are doing is to generate interest on the tuition fee loan and study loan during the course of study in which interest is not charged on these loans. So this is something which you may wish to consider if you or you have any children who are entering into a university soon.
Fundsupermart has an excellent article here on the statistics of the past STI market corrections which I have been feeling too lazy to compile. The statistics were compiled from 1987 to 2007, spanning 4 bull markets with the exception of a partial recovery from the technology recession in 2001 being stopped by SARS and the Gulf War.
Distribution of corrections:
(Taken from fundsupermart)
Median level of corrections : -8.6%
Average level of corrections : -10.6%
Duration of corrections
For corrections of 4% from any peak,
- Takes place once around 155 days or around twice each year
- Average correction last 46.5 days
- Median correction last 24 days
One month can make a lot of difference. I remembered just a month ago, the stock market was still very optimistic with analysts calling for a bullish market for 2010. On the contrary, I adopted a much more conservative and cautious view that this year will not be a repeat of the previous year of phenomenal growth as stated in my last post of 2009 here.
The highest closing level of STI so far for this year was made on the 11th of January at 2933.53 while the latest closing level made on this Friday was 2683.56. Thus STI has corrected by around 8.5% so far. Given that the economy is in the recovery phase and it is no longer in any recession, I doubt we will see any plunge of more than 30%. The level of around 3000 made last month was way too optimistic as mentioned before previously in my post since when the economy was at its peak previously, STI reached a level of 3900 only. As such, this correction will be a excellent time to add on to your current positions. I do hope that this correction will carry on further.
