Book Summary

TK 1003 Wealth Planning & Mgmt

September December 2010

Contents Topic 1: Wealth Creation and Mobilization............................................................................................1 Topic 2: Nature and Scope of Wealth Planning ...................................................................................2 Topic 3: Wealth (Asset) Allocation Process ............................................................................................4 Topic 4: Investment in Real Estate .......................................................................................................14 Topic 5: Investment in Securities .........................................................................................................18 Topic 6: Insurance and Takaful Scheme ...............................................................................................20 Topic 7 Estate planning and Faraid ......................................................................................................23 Topic 8: Retirement Planning ...............................................................................................................27 Topic 9: Taxation Planning and Management ......................................................................................34 Topic 10: Zakat .....................................................................................................................................40 Topic 11: Waqaf ...................................................................................................................................41 Topic 12: Issues Related to the Wealth Planning and Management....................................................45

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Topic 1: Wealth Creation and Mobilization Summarized by: Shujau HP: 010-8931372. Q1: What is wealth?

Wealth is an abundance of items that has economic value - Money, real estate, health care, and livestock.

Wealth is a relative concept and varies between societies and countries: wealthy person in village is not so in KL. A wealthy person in KL may be an average person in New York.

Wealth increases with production and decreases with consumption. Wealth also means surplus income. (wealth sustains you when you are not working) Income and wealth: Income is how much assets that come in, whereas wealth is how much assets one

has accumulated over a period of time. Wealth is not limitless it may be available for certain period of time.

Q2: What are the three fundamental characteristics of wealth in conventional aspect?

1. Growth. 2. Consumption. 3. Marginal Value- Resources are scarce.

Q3: What is the difference between wealth in conventional and Islamic perspective? Islam: wealth consist both elements of life: material and spiritual. Conventional: only material. Q4: What are the Steps of Wealth Planning?

1) Creation 2) Accumulation 3) Protection 4) Distribution 5) Purification. (Purification is found in Islam unlike conventional perspective). Hadith: Give alms from

your wealth for indeed alms purifies Q5: what are the rights to wealth from Islamic perspective?

1. Right to God we are trustee- the real owner is Allah. We shall be accountable: must pay Zakat. Must follow the guidelines of Shariah while accumulating and distributing the wealth. Blessed wealth is the wealth that brings benefits to oneself and others. Hadith: the upper hand is

better than lower hand (Giver is better than the receiver in the sight of Allah) 2. Right to men.

Give the Poor and needy Poor: Whose income is less than 50% of their basic needs - Food, clothing, and shelter. Needy: Income is not sufficient to their needs. (Income greater than 50% but not enough)

Q6: What are the two aspects of private ownership?

Formal ownership: legal aspect proof of your ownership, e.g. you own a house. Exercise of ownership rights: usufructs rights, e.g. you rent a house.

Q7: What is wealth accumulation?

It is an investment strategy to preserve the invested capital so that it cannot be lost under all circumstances.

Preservation is the primary objective in wealth creation according to many wealth planners. In wealth accumulation, the higher the risk the higher the return you earn.

Q8: What are the three basis of wealth creation?

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a. Consume b. Store c. Invest

Q9: What is the challenge in wealth accumulation?

The challenge is to strike a balance between preserving the accumulated wealth and beating inflation at the same time beating the risk of losing the purchasing power.

Q10: What are the three main factors in wealth accumulation?

1. The more we save the more we accumulate. 2. The more we save, the less we spend. 3. The more we save, the less rate of investment we need. 4. Other four factors: Externalities (health costs, pollution); Commercial activities (destruction of natural

habits); Harmful goods (cigarette); and ethics (Pollution and environmental costs may not be sufficient.

Q11: What does Islam say about wealth accumulation and wealth generation? Wealth accumulation (It may imply hoarding and monopoly) is prohibited (Q9:35). Wealth generation (It implies the expansion of wealth) is encouraged (Q55:60). Wealth must not be kept idle, but it should be invested. Hadith: Whoever develops an idle land, it

belongs to him. Abdul Rahman bin Aufs wives inherited 80,000 dinars and his relatives 40,000 dinars. Wealth generation is not restricted even during sacred day Friday. (Q62: 9-10) Hadith: It is not your wealth unless you spend it. (meaning) You spend your wealth to get falah (success) in this world and Hereafter. Paying alms - Zakah (one of the pillar of Islam) is one of the forms of wealth management that helps to

reduce the inequalities in wealth and income distribution. (Reduce the gap between haves and have-nots).

Sacred duty - If you dont pay Zakat you may receive capital punishment. (Caliph Abu Bakr) Q12: What are the skills that you need in wealth generation?

Skills in mobilizing Planning and management skills Financial skills Communication skills Marketing skills Credit skills Technical skills

Q13: How does Islamic world view play significant role in wealth planning?

The world view of Islam is based three concepts: Tawhid (Oneness of Allah), Khalifa (Vicegerency), and Al-Adl wal Ihsan (Justice and benevolence).

Justice (adl): A fair exchange between money and goods. Benevolence (Ihsan): Do better than justice or excellence in performing the task. Shariah not only forbid riba but it provides an alternative trade. (2:275) There are many Shariah based commercial instruments: Salam; Istisna Murabahah; BBA; Ijarah;

Mudharabah; Musharakah and so on.

Topic 2: Nature and Scope of Wealth Planning Wealth Planning and Management Summarized By: Shinta. Email: clarashintacanggih@ymail.com

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Wealth planning

More sophisticated and complicated than financial planning, especially for High Net worth Clients (HNWC) who have so much surplus in their wealth. Its used to make sure weve enough in future. Use for long term and need some help from specialized consultant.

Step of wealth planning : 1) Generate the wealth

First step, how to get the wealth is. It must be through halal ways 2) Expanding/increasing/make it growth

Through the right way according to Shariah 3) Enhancement

Allocate the wealth correctly and properly 4) Preservations

Make protection toward the wealth through insurance/takaful 5) Distributions

Use the wealth in right way (consumption, saving, etc) 6) Purification (redistribution)

Other people right in ours. Example : waqf, sadaqah, faraid, zakah

Aspect of wealth planning; Investment planning

Designed to help individuals with investment strategies with the objective of generating positive return on investment.

Education planning Object to plan our children education to prepare better life for them. Since the cost of education has increased over the years, parents should develop a saving strategy before their children start post-secondary education. For education plan, the earlier the start it will be better.

Tax planning The objective is to minimize or defer income taxes payable. The plan should be made through legal ways by structuring the right mix of investments. e.g.: by investing in different countries where tax rates are lower

by leveraging on tax laws that allow for tax restructure so that we can pay the tax later Generally the minimization of income tax can be viewed from two perspectives. While individual is still alive there are variety ways (in many countries) which will either defer tax of shift income so that annual income taxes can be paid at some stage and arrangements can be made so that the funds income tax may come about by leaving specific assets to certain group of taxpayers. At the time of death, it may come about by leaving specific assets to certain group of taxpayers.

Retirement planning Plan to ensure that weve enough money to spend when we retire. Depend on what we want to do in our retirement time (lifestyle, place to live) including the future inflation rates, anticipated cost living, current retirement asset, current retirement saving, and also investment strategies

e.g. : Insurance policies, investment in properties, saving

Estate planning It is a lifelong affair planning. It can protect peoples wealth and legacy, helping to grow and preserve asset to our asset the heir in the future.

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The major objective of this plans are to ensure: - Protection of heirs by providing them with control and continuity of service - Control who manages and receives assets after the death of us - Administrative expenses and legal fees associated with handling the estate planning and management are

minimized - Greater share of assets are transferred to our heir and other beneficiaries

Element of wealth planning (refers to page 34-35) - Use of private banking technology - Customer relationship management - Financial planning tools

Process of wealth planning (refers to page 36-37) - Taking inventory - Analyze and evaluate - Designing the plan - Implementation - Monitoring and reviewing

A major dimension of wealth planning process is the adjustment of liquidity (the nearness of a financial asset to cash which itself is a financial asset differing from all others in that cash is only used as a medium of exchange). The liquidity of a given financial asset is gauged by the ability to convert the asset into cash at any time without making a loss. Wealth Planning in Islam Islam encourages people to make planning about their wealth, although the real wealth actually belongs to Allah and man is only trustee. They are required to manage wealth according to the dictates of Allah, because they have been respected and considered as vicegerent of the earth and Allah will ask them about their responsibility toward their wealth in hereafter. In Islam, one must always give preference to the hereafter unlike the risk return where one has a choice whether to take a higher risk in exchange of a higher expected return. It is consider to trade-off concept in Islam which has another dimension between this world and the hereafter. Meanwhile this does not mean that one should not manage risk. According to Islam, process of wealth planning should include the following:

- Cooperative effort - Peace and stability - Service to others - Charity to help others - The principle of sharing - Responsibility towards development

Islamic wealth planning is subject to three major conditions: - Wealth must be planner in absolutely honest manner - Wealth must be planned and managed in a highly responsible manner, to benefit its

owner. Family, and community as a whole - Wealth must be planned through halal (permissible) means and does not in any way

distract Muslim from their strong faith in Allah Objective of wealth planning in Islamic Perspective

- To obtain only income, which is not forbidden according Shariah principle - To encourage mankind to work hard and honestly in increasing income and managing

wealth - To generate and accumulate income in a legitimate way - To donate and develop well being

Topic 3: Wealth (Asset) Allocation Process Summarized by: Asrar and Suha.

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Wealth allocation process divided into four sub topic: 1) Establishing of objectives:

-Financial planner should understand the modern portfolio management

-Islamic financial planner should ensure that the process is Shariah compliance

-Modern portfolio theory (MPT): The analysis of rational portfolio choices based on efficient use of risk and has two important roles: a) Practitioners recognize the important of portfolio management for the investment objectives. B) Helped spread the knowledge and use of quantitative methods.

A)Speculation and quantification of clients objectives, constrains and preferences Objectives: 1) return requirements and risk tolerance level 2) Muslims objectives avoid investment in riba, maisir, gharar, haram Constrains:

1) Internal: Liquidity needs, time horizon and unique client circumstances 2) External: Tax, Legal, regulatory requirements

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Portfolio polices and strategies

-Investment policy statement defines the investors objectives, constraints, amount of funds, investment methodology.

-Investment policy statement will allow for continuity of policy decisions regardless of change in fiduciaries.

-Investment policy statement long term goal: helps the investor keep sight of objectives and match the appropriateness of objectives. -Investments policy statement short term goal: lead to sub-optimal investment performance.

- Based on the investment policy statements planner can make asset allocation decision that suits the investors investment strategies to make security selection.

Investment approaches based on investment structure are:

-Passive investment approach:-doesnt react to changes in expectations. -Buy or hold strategy -Portfolio of securities design to replicate the return -fixed portfolio

-Active investment approach:- Does react to change in expectations -changes benchmark or composition portfolio -positive excess risk-adjusted return or positive alpha -Semi-active, risk-controlled, enhanced index approach:-react to change of expectation -managers increase the weightage to make holding profitable. B) Economic/ market factors:-Forming of capital market expectations

-differentiate between assets in the long run based on level of risks and expected returns

CREATING THE STRATEGIC ASSET ALLOCATION:

The Execution step:- -The manager constructs and revises a portfolio within the guidelines of strategic asset allocation. -Also used to determined asset allocation -Investment strategies + expectations= Portfolio -When the planner used portfolio he should understand the transactions cost includes: 1) Explicit transaction costs (ex-commission) 2) Implicit transaction costs (ex-bid, ask price) 3) Missed trade opportunity costs (ex-lower price) The Feedback step Diagram

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Return Objective:

-Return requirement: is the return level necessary to achieve the investors primary long-term objectives driven by i) Annual spending ii) Savings

-Return desire: is the return level to achieve secondary goals or objectives

-Approach used is total return which look at investors goal + annual return

-If return objective doesnt meet the level of risk of the investor, the financial planner should eliminate the goals and objectives

-By the cash flow analysis in the investment policy statement we can calculate the required return.

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For the Financial planner must address his investors return objectives by knowing the following questions:

-How is return measured? -How much return does the investor say he wants? -How much return does the investor need to achieve on average? -How is the return objective set? For the financial planner to address his investors acceptance level of risk through knowing the following: -How do I measure risk? -What is the investors willingness to take risk? -What is the investors ability to take risk? -What are the specific risk objectives? According to Malkiel (1996) factors affect persons risk: -Ability -Willingness Risk level takes several forms: 1) Market beta which calculate level of fluctuation of market return 2) Mean-variance (MV) the mean of periodic returns 3) Investors likelihood returns affected by inflation rate

1)Investors investment time horizon

(based on liquidation)

There are three ways the time horizon influence:

a) The length

b) The policy decision

c) Rebalancing periods

-Short term investment stable prices

-Long term investment take more risk

2)The tax regime which regulates the particular investment or investor

-Tax effect on the investments

3) Liquidity needs may determine the type of investment suitable for an investor.

-Liquidity: quick sale

-Marketability: ability to sale off

4) Legal consideration and special circumstances faced by the investor

-ethics, beliefs

Feature Markowitz model Samuelson-Merton Model

Investment constrains

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Measure of wealth End wealth Life time consumption

Time Single period Multi periods

technique Savings and diversification Saving, diversification, hedging, Insuring

A guide line for benchmark must be :

1. Specified in advance 2. Investable 3. Cleary measurable 4. Appropriate 5. Reflective of current investment 6. Specified in advance.

2- Identifying potential opportunities.

1. Capital market expectations: after the manager decides the asset allocation then processes the principle of diversification. Being by dividing potential investment channels into asset classes .

2. Capital market expects future return and volatile correlation . 3. Capital market expectations based on historical returns ( disadvantages

1. Lack of accuracy . 2. Irrelevant data to the presents .)

2. Shariah Compliance of Asset Class: - Haram generate profit in unacceptable way e.g. alcohol , gambling etc. - Scholars accepted 5% of the core business and some 10 % . - Riba is forbidden because it is predatory and produces profit at another persons expense. - Ratios to measure riba :

Ratio to measure the amount of a companys liquidity. Ratio to measure a companys interest income. Ratio to evaluate how much interest paid on debt.

3. Possible Investment Asset Classes: - Aim to achieve the highest return with the given level of portfolio risk.

Long term capital + return / risk objective + constrains = Appropriate strategic asset allocation

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-Mark Kritzman characteristic for asset class:

1) Independent

2) Raise utility without superior

3) Internally homogeneous

4) Investable

4. Asset Allocation Strategies a. Integrated Asset Allocation as a strategy:- consist of series of decision step:

(REFERE TO PAGE 96-97) -Optimal portfolio determination, three steps:- i) Advisor choose a function to maximize ii) Historical time series data iii) Input obtained allocation decision -Investors who are higher risk tolerance level the lower the lower the penalty of the required return. To eliminate portfolios:-

1) Mean-variance are the best approach to determine investor utility =-2

2) Stochastic dominance: by selecting a group of factors whose combination will be closest to the desired result. (e.g. graph p.104) (B lies right= higher return)

3) Combine the two approaches and specify the portfolio by minimizing the probability that the return will fall short of the target rate of return

b. strategic asset allocation as an Asset Allocation Strategy -long term policy uses to estimate future capital market return, risk and covariance by using long term mean return, riskiness, covariance and forecast of future capital market conditions over the planning horizon.

-Manager do minor rebalancing during the planning horizon to meet the investor`s - Rebalancing shouldnt be more than once a quarter

- Strategic asset allocation is the same as integrated asset allocation except there is no need for feedback loops via D4 (page 97)

c. Tactical asset allocation strategies -It is active asset management approach - Attempt to derive incremental returns from changes in capital market conditions. -Class appraisal: The proportion of the portfolio in stocks rose relative to bonds

-Investor risk tolerance and investor-specific information are assumed to be unchanged unlike under the strategic allocation approach -Tactical asset allocation is the same as intergraded asset allocation except feedback loops via step D4 doesnt involve feedback to step A1

-Implement asset class the fund manager must:

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i) Establish portfolio normal mix jointly with the investor ii) Establish a normal range or mix d. Insured asset allocation as an asset allocation strategy:

- Reactive asset strategy known as constant proportion strategy - Capital market conditions, risks and returns do not change but the investors objectives and constrains change along with the investors wealth/ net worth - Increase in the proportion invested in equity also bonds drop in the allocation for t-bills -Hedging is a common method of achieving an insured portfolio

e. The great debate over the value of asset allocation -Allocation of asset most crucial part of the investment process

f. Asset-liability approach to asset allocation - Portfolio management focus risk volatility of returns from invested assets -Focusing on asset gives only a partial optimization process -Facing risk from variable of returns and asset also claim on them -To achieve the goal involve hedging liability risk with asset risks -It called portfolio dedication or liability funding -Asset-liability management involves two: i) cash matching ii)duration matching -Cash-matching using a portfolio of bonds is constructed matches portfolio with the nearly possible liability -Duration matching is slightly more complex approach requires the reinvestment of the interim returns of a bond (e.g.. Reinvestment returns over the investment horizon plus the original principle due to maturity -The present value of cash flows will be received is matched against the number of years into the future the liability is due Passive , Active or Semi- approaches to Investing:

Active - Active asset allocation approach is routinely change after initial allocation is made so should be

checked continuously. Passive

- Passive asset allocation approach once its established, left alone - Is when markets are efficient and processes that generate return are stable in the long run. - Traditional allocation strategies are passive. Constant mix approach: -Low portfolio turnover but doesnt preclude that adoption of active security selection procedures. -The portfolio allocation mix is set but may be allowed to vary within a given tolerance levels difference away from the benchmark allocation. -This tolerance level may be as fixed percentage of the portfolio value as the investor decide (e.g..+- 5%) Constant proportion portfolio Insurance: -Seeks to vary the amount invested in stocks according to a formula that includes a floor portfolio value as:

Buy and hold strategy: -were advocated therefore active security selection was though unnecessary, by scholar research Semi-active approach: -Allows recourse to lower cost passive selection alternatives but retain the flexibility to make asset or security selection. Rebalancing the stocks portion of an asset portfolio: 1) Indexing approach 2) Constant Beta approach 3) Constant Proportion approach Rebalancing the bonds portion of an asset portfolio: 1) Indexing

Ringgit Value Invested in Stocks = Multiplier x (portfolio value- floor value)

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2) Ladder of maturity approach 3) Barbell portfolio approach 4) Bullet Strategy approach 5) Substitution Swap 6) Rate Anticipation Swap 7) Inter market/ Yield spread Swap 8) Rating Swap Manager selection: Choosing fund managers criteria: 1) Investment approach 2) Expected return 3) Expected impact on the volatility of clients portfolio 4) Liquidity 5) Trust 6) Fees Fund selection: - Unit trust mutual funds provide diversification, divisibility, low transaction costs, record keeping, and

professional management for the individual investor. - Unit trust/mutual has made choosing the right funds a challenge to many investors although

performance statistics and fund attributes (e.g.. Information on fund managers, expense ratio etc) -In the beginning the financial planner should know his investors risk aversion, investment horizon, tax and financial status. -The approach used when selecting funds is the analytic hierarchy process (AHP) Advantages of this approach are: 1) Based on each individuals unique investment objectives and constraints it provides a systematic

approach to rank the mutual funds. 2) It prevents the investor from making inconsistent preference assignment 3) It minimize the amount of technical input required from investors - The difference between AHP and MPT is that AHP concern about investor preferences The AHP methodology consists of four steps:

1) Develop the hierarchical structure: -Mission -Selection criteria -Alternative

2) Assign a relative importance of each selection 3) Rank alternative under each criterion 4) Rank each alternative`s contribution to the mission AHP framework helps in to represent the problem in a hierarchical structure. There are two hierarchies structure (refer p.124) Each is divided into three levels: (refer p.125-127) 3. IDENTIFYING RISKS AND CONSTRAINTS Risk measurement tool: -Markotwiz and sharp -Treynor -Sharp -Jensen and information -VAR: value at risk it focus on the current portfolio i) var should be computed to an asset, benchmarks and liabilities of the investors portfolio ii) var can be used for short-term as well as long-term

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iii)var measure the worst case Portfolio performance evaluation: -Superior performance achieved by :i) superior security or ii)superior timing -Performance can be measured in two ways: i) absolute measure ii) compare relative terms

Ways of measuring return:

1) Dollar-weighted Return

Dollar weighted return (%)=

2) Chain-linked Returns

Chain-linked Returns= [(1+PR1 ) x (1+PR2)+ (1+PR3)x.x(1+PRn)] -1

3) Cumulative return:

-Total return up by two was: i) Actual growth or ii) cumulative percentage

4) Annualized Time-weighted returns

Annualized return

5)Simple cash flow-Adjusted returns

6)Time-Weighted Return approach

Time-Weighted return= [(1+R1 )x(1+R2 )x(1+Rn )]1/n -1

Modified Diets=

Ways of Adjusting Returns for Risks

1) Sharpe Ratio

Sharpe Ratio=

2) Treynor Ratio

Treynor Ration=

3) Jensens Alpha or excess Return

4)Modigliani-Square or M measure and Treynor square or T measure 5)Information Ratio or Excess Return to non-systematic risk ratio or appraisal ratio

Information ratio =

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6)Downside Deviation or risk of loss measure

Downside Deviation risk=

7)The Sortino Ratio

Sortino Ratio=

8)Value at Risk ( refer page139)

4. Potential Investment Channel Structured Products -Any investment vehicle designed to fulfill a principal objective by combining a range of techniques or elements, which couldnt achieve the same result individually -Areas or structuring the fund are i) hedging ii)zero coupon

Advantages 1) Multi-asset means clients assets are invested equally across fixed income, property,

equities and hedge funds 2) Multi-manager allows the selection of a range of managers who are skilled in

managing the different asset classes 3) Multi-style: within each assets class, the investment team gets to blend investment

styles and approaches. Ads further diversification and reduces duplicating holding 4) Multi-currency led to development where the exposure is kept to the base currency of

the fund thus reduce currency risk 5) Neutral asset allocation means the portfolio is rebalanced on monthly bases to ensure

investors exposure to the four asset class is virtually equal. Customers are not exposed to deliberate over or underweight asset allocation

strategy. Increases risk but remains neutral Allows fund to make a profit from rising asset classes and reinvest the falling

ones

Topic 4: Investment in Real Estate Summarized by: Shujau. (010-893-1372) 4.1 Definition

Real estate refers to real property. Real is also mean royal. During the time of kings it is known as Royal property.

4.2 Characteristics of real Estate

4.2.1 Physical characteristics: 1. Immobility effect: no physical market 2. Huge in Size 3. Heterogeneous Each property may vary according to location, design, size, layout, security etc. 4. Durability/Perpetuality 5. Long Production Time - normally take long production time to be completed. 6. Property Management

4.2.2 Economic Characteristics: 1. Interests and Rights It must be capable to transfer of ownership and any particular interest. 2. Decentralized Market Normally properties are bought and sold through agents. 3. Hedge against Inflation real estate provide better hedge against inflation.

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4. Large Transaction Costs/Indivisible include many costs professional fees- estate agency, legal fees, registration of interests with relevant authorities, high renovation costs and so on.

5. Supply limited overall supply of land is virtually fixed.

4.2.3 Legal Characteristics: 1. Different legislation and law real estate transaction is subject many laws National Land Code

1965, Contract Act 1950, Town and Country Planning Act 1972. 2. Complicated Transaction Procedures Laws and regulations require strict compliance. 3. Statutorial charges assessment charge, quit rent, premiums, and Real Property Gain Tax.

4.3. Price determination

Price is determined by the forces of demand and supply. Real estate property is relatively inelastic in nature due to physical in nature of land, planning laws

and security measures. There are four main interests in real estate:

i) Occupation ii) Investment generally long term. iii) Speculation generally short term. iv) Development.

In general there are main six factors which affect when determining price of real estate. There are:

1. State of the economy e.g.: recession demand goes down. 2. Changes in the structure of the economy- e.g. increase use of IT will need to increase size of office. 3. Productivity of the property. 4. Government intervention e.g.: New shopping centre shift the demand to that area. 5. Changes in the transport facilities e.g.: Establishment of new LRT line will increase the price

properties nearby. 6. Alteration in the size and the structure of the population e.g.: increase in population itself and

working population may increase the demand for real estate properties.

Nature of the Market Space markets means that households and business buy and lease buildings to live and work. Asset markets means investors buy and sell the rights to future cash flows that real estate will generate

from the users in the space markets. In real estate there two types of market: open and controlled market. Open Market In an open market it is not possible to tell definitely whether the existence of supply result in demand or

vice versa. There are many factors that affect the price of real estate in an open market. Some of them are as follows:

a) Economic Factors. 1. Regional e.g. Property in Malaysia may be more demanding than Thailand. 2. International e.g. Currency exchange rate - change of oil price affects global economy.

b) Geographical a. Location e.g. Properties in KL is more demanding than Selayang. b. Topography e.g. Houses in Hilly area more demanding than low-lying houses or flats.

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c. Climate Areas where natural disasters like typhoon or earthquakes are less demanding than other some area of Japan (always quakes) some area of Bangladesh (always flooded).

d. Communications e.g.: Condominiums with telephone line, broad band and wireless demand higher price.

e. Services e.g. Proper security, club house, and proper maintained condominiums demand higher price.

c) Population grow of population demand higher price. d) Physical Diversely shaped, with uniquely designed, build with special materials with new

facilities, equip with high technologies would result to demand higher price for such properties. e) Technological or Building Method. f) Fashion and Trends g) Occupancy Status h) Development Approvals Announcement of government plan to develop area would attract more

investors and may increase the price consequently. a. Tenure and Title Conditions or Restrictions e.g.: Freehold demand higher price than

Leasehold properties. b. Parties Involved.

i. Valuers or Property Consultant Independent Professional Valuers determine the price of the real estate by using different valuation techniques or methods.

ii. Real Estate Agents They tries to obtain a reasonable price by bargaining between the vendor and purchaser.

Control Market

1. Government Policy Controlled Ceiling Price e.g. 30% of houses in particular area should not exceed RM42, 000. This is to facilitate the middle and lower class of the country to enjoy the constitutional right to live.

a. New economic Plan Quota on Ethnic Group Purchasers (Discount) e.g. Bumiputra gets 5-10%. To reduce the unequal of income distribution between two ethnic groups.

Methods of Evaluation There are five common methods to evaluate real estate:

1. Comparison Method 2. Investment Method. 3. Cost Method. 4. Profit Method. 5. Residual Method.

1. The comparison Method (* Most important method for exam purpose)

In this method you compare similar property in the same area where the market is really stable. When comparing the two properties the difference must be borne in mind: size of property; the floor

area; the design; the number of rooms; age; and condition of the property. The problem may arise when the market is not stable and this method of evaluation may not be the

appropriate one. Note: To understand how the comparison method is done please refer to the table in page 164. 2. The investment Method

This method is used for valuing properties which are normally held as income producing investments. The formula for investment valuation is (Net income Years Purchase = Capital Value)

Note: To understand how the investment method is done please refer to page 165.

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3. The cost Method / Depreciated Replacement Cost (DFC) This method is used just to cover the cost and it is not used to make profits. The government may use this method when building schools, fire stations, government quarters, temple

or mosque. In this method, as estimate must be made to find the cost of replacing the site and building at the same

time making an allowance for depreciation. Note: To understand how the cost method is done please refer to page 166. 4. The profit or (Account) Method

This method is used when you find the comparison method is not available. (!!!) The types of properties are restaurants, hotels, or theatres. Under this method, the valuation may have to be made purely by reference to the profits which the

entrepreneur wishes to make from that particular property. Note: To under how the profit method is done please refer to page 167&168. 5. Residual Method

This method is used for redevelopment: how much will it takes to renovate a particular property. Note: To understand more please refer to page 169. Real Estate Cycles

a) Mechanism of Real Estate Market Cycle. a. Intervention by government during peak or low

b) International Influence c) Regional Influence

Risks involved in Real Estate Business

1. Economic Investment Risk a. International Risk of speculation cause economic downturn sometimes e.g. International

speculator George Soross speculation affect negatively on South-East Asian currency market in 1990s.

b. Regional Regional political corporation e.g. Political Boycott e.g. UN sanction on Iran. c. Cycle of Demand and Supply we can always predict but we can never know the actual

market. d. Government Policy e.g. higher rate of Tax of Real Property Gain. e. Value Depreciation however, depreciation could be offset by appreciation of land value.

2. Building Physical Risk a. Expected Risk

i. Normal wear and Tear b. Unexpected Risk

i. Natures Act e.g. Flood, landslide, earthquake, Tsunami and so on. ii. Lack of maintenance or low construction quality e.g. cracks on wall movement of

the base, erosion on the construction materials. 3. Legal Risk

a. Acquisition Government acquisition may be to develop Highways. b. New zone declared by government.

4. Government Policy a. New Structure Plan e.g. Vision 2020.

Laws Relating to Real Estates

1. National Land Code 1965 The purpose of this law is to ensure the uniformity of law and policy with respect to land tenure, registration of titles relating to land, transfer of land, leases, and other rights throughout Malaysia.

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2. Town and County Planning Act 1976 - it guide to structure the planning system and formulates a policy in general.

3. Local Government Act 1976 It deals with provision of services to the residents and tax assessment from landlords.

4. Real Property Gains Tax (RPGT) to control the real estate secondary market to reduce the transaction of buying and selling of real estate which is done not intended for the primary purpose dwelling and other business purposes.

5. Stamp Duty Act 1949 It guide on the assessment and collection of stamp duties according to the value.

6. Strata Title Act 1985 It deals with the duties and rights infringed with the property e.g. Condominiums all the landlords bear the responsibility of maintaining, renovating, of the common areas of the condominium and swimming pools and other properties by charging maintenance fee and sinking fund from the landlords or strata title holders.

Conclusion

Proper valuation and examination should be done while acquiring a property. Investment in real estate today requires complicated researched, tools, and strategies. We require deep understanding of characteristics, price determination and life cycle of real estate. We need professional advisors who can advise investors in strategy study, legal study, compatibility

study, market study, marketability study, architectural study, engineering study and financial study.

Topic 5: Investment in Securities Summarized by Habibur Rahman HP: 014-930-8935

Securities are financial assets traded in capital market. Investors hope to get return with these market

traded instruments form the annuity payments and from the potential increase in the value of the capital. The objective for issuing securities is always to raise financing.

Types of Securities: Instruments are broadly categorized into two categories: Equity instruments and Debt instruments. (A third increasing popular category is hybrid which combines features of both). The difference is that debt is fixed in time and fixed in claim whereas the equity residual in claim and perpetual in time, because it provides ownership. The most common equity instrument is the common stock and the most common debt instruments are binds. Equity Instruments: Common Stocks: It represents ownership in a listed company which is jointly owned by its shareholders. Shareholders enjoy the 1) rights to residual value of a firm in the event of liquidation, 2) right to dividends and 3) voting right in AGM. Investment in stocks is certainly riskier as compare to investing in bonds and deposits, however, over the long run; it tends to be higher returns as empirical studies in several developed markets have shown. Initial Public Offering: This is a process for a firm to sell its stock to the public. A firm must get approval from the Securities Commission to become a public listed firm after following its guidelines and requirements. Firm hires a Merchant bank to undertake IPO issuance. IPO market is often called Primary Market while the place where trading takes place subsequently is called Secondary Market. Halal Stocks and the Shariah Index: Shariah Advisory Council was formally established on 16 May 1996. It was formed to advise SC on matters related to the Islamic capital market. Shariah compliant companies will be classified as approved securities and listed on Bursa Malaysia. Securities will be excluded from this list if riba, haram products, gharar, or gambling are involved in the operations. In order to classify the securities SAC uses Quantitative and Qualitative methods. In Quantitative classification companies are either 100% permissible or 100% non-permissible or mixed where the non-permissible activities are less than 3%. Quantitative method is

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about the public image of the company, whether it has maslahah to the Ummah, and the country, haram element is small enough etc. Each company is reviewed based on its last financial reports. Debt Instruments: These are the promissory notes issued by the borrower. Sovereigns are the bonds issued by the governments in order to finance development projects. Private entities issue Private Debt Securities. Bonds are also classified by their tenor. Short term (less than 1 year) bonds are known as Treasury Bills if the issuer is the government and Commercial Papers if the issuer is a firm. Long term bonds are called Government Bonds if they are from the government and Corporate Bonds if they are form firms. Coupon Bonds are bonds that payout periodic interest. Callable and Convertible Bonds: In callable bond, the issuer has right to redeem them at a predetermined price before maturity and in convertible bonds the holder has the right either to receive the face value of the bon or to convert them to a predetermined number of common stocks of the issuing firm at maturity. Islamic Interbank Money Market: IIMM was established in 1994 to function as interbank market for Islamic banks in Malaysia. The money market is where short term debt instruments are issued and traded. Over the 12 years, it has seen the introduction of several new instruments. Islamic Debt Securities: Sukuk while IIMM instruments are of short tenor, Sukuk are intended to fulfill the needs of medium and long terms securities. BBA, murabaha, istisna and ijarah are the underlying contracts of bond in Malaysia. Most famous of them is BBA framework. Industry is moving towards Sukuk ijarah due to the some concern about BBA. Hybrid Instruments: These are instruments that have features of both equity and debts. Followings are few of such instruments: Preferred Stock Preference Shares: they have a par value, fixed dividend amounts and generally a terminal maturity (these are the features of debt securities), dividend on preferred stock may be missed [if the company lacks the financial ability] and are not tax deductible. Warrants/Transferable Subscription Rights: It is a security that entitles the holders to buy stock of the issuing company at a specified price. It is typically attached to loan-stocks or bonds issued by the company. The exercise of warrants/TSRs leads to dilution. Call Warrants: these are essentially call options issued by a third party, not the issuing company like TSRs. It doesnt lead to dilution and it is not attached with other securities. Irredeemable Convertible Unsecured Loan Stock: It is like fixed income debt instrument and then converted into equity at predetermined dates, at or prior to maturity. Price Determination: Pricing/Valuation of Stock: there are numerous factors that influence the movement of stock price, like us firm specific factors, industry factors, the macro environment, investor psychology, sentiments, performance of other regional stock markets. One of the modules is Dividend Discount Model (DDM). Stocks price today = present value of future dividend+ Future selling price of the stock (for more information look, p. 195). Since future price of the stock cannot be determined today DDM concentrates on earnings from the stocks. Therefore there are three forms of DDM:

i- Zero Growth Model: dividend has no growth perpetually. (p.196) D=2rm, 2rm etc. ii- Constant Growth Model: Dividend grows constantly (p.196) 2rm, 2.1rm, 2.31rm etc. 10%

growth. iii- Accelerated Growth Model: dividend grows faster. 1.8rm, 2.16rm. 2.59rm et. (20%, 22% etc).

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The market required rate of return: p=D/(k-g), p=discounted price, D=Dividend, K=The market required rate of return, G=growth (p.200). Required Return and Risk: K should increase when the market is riskier. Pricing/Valuation of Bonds: refer to p. 202. Bond Yield and Yield Cures: to determine bond price four variables are important; face value, time to maturity, coupon amount, required yield as discount rate. The yield curve is essentially a locus of points relating the required yield to the time to maturity for a given risk class of bonds (p. 203). Interest Rate Change, Bond Yields and Duration: by increasing the interest rate yield curves shifts upward. The required yields would increase and given the higher discount rate cause bond and other assets prices to fall (p. 204). Coupon and Yield To Maturity: the coupon of the bond is the interest paid on the bond YTM is the required return for the bond. This two elements impact bond prices. If the coupon of is equal to YTM then the bond sells at par (market price equals its face value or par value). If the coupon is the lower than YTM, the bond would sell at discount to par (p.205) Pricing of Islamic Accepted Bills: pricing of Islamic Interbank Money Market instruments is based on same logic of conventional instruments (discounting model). The prices are determined by discounting future amounts receivable using market required yields.

Risk Elements: following are the major sources of uncertainty or elements of risk in investment: Business Risk: Uncertainty of income flows caused by the nature of a firms business. Financial Risk: increase in uncertainty because of fixed-cost financing, (possibility that a bond issuer will default). Liquidity Risk: The risk that arises from the difficulty of selling an asset due to the insufficient secondary market for that specific asset. Currency Risk: Risk arises from the changes in exchange rate. Country Risk: risk arises from the possibility of major changes in the political or economic environment of a country. The Capital Asset Pricing Models (CAPM):??? Law Relating to Securities: Banking and Financial Institutions Act1989 (BAFIA) BNM supervises financial institutions under this act. Security Commission Act 1993: The role of SC is to promote a strong securities and future market and to ensure the orderly development of the capital market in Malaysia. Security Industry Act 1983: It provides a regulatory framework of the securities industry in Malaysia. Securities Industry (Central Depository) Act 1991: it regulates the central depository relating to the deposit, holding and dealing in securities deposited etc. Future Industry Act 1993: It provides regulatory framework of the future industry in Malaysia.

Topic 6: Insurance and Takaful Scheme Summarized by: Ramil Mirkasimov e-mail: ramil.mirkasim@gmail.com HP: 017 6900 773 Insurance and takaful are instruments that create an instant estate. The word takaful is derived from the Arabic root word kafala which means to guarantee. The Takaful Act 1984 of Malaysia defines takaful means a scheme based on brotherhood, solidarity and assistance. Insurance plays a great role in protection of assets. Planning for the unexpected today may help you avoid unpleasant surprises in the future. Insurance reimburses people for insured losses in the event of an untoward incidence such as illness, accident or death. At the same time it can provide investment capital, lend money and

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help to reduce anxiety for individuals and society. In general insurance provide financial security against premature death and disability. Life insurance, payable when one dies, can provide a surviving spouse, children and other dependents the fund necessary to help maintain their standards of living, help repay debt and fund education tuition costs. Factors affecting the need for insurance and takaful: (a) Income-replacement needs: income that is lost and value of benefits thatd have been provided to the family had the client been alive (b) final-expense needs: related to burial, expenses such as burial plot, washing, embalming and transportation (c) readjustment-period needs: when client dies and his wife is unable to work, wealth planner should conduct an actual financial needs the clients wife during the adjustment period (d) debt-repayment needs: include loans on houses, cars, business loans, personal loans, etc. (e) College expense needs: for families who dont have a college fund (f) Government benefits: social security survivors benefits like the Employees Provident Fund in Malaysia and pension funds also affect the need for insurance (g) Existing insurance and assets: families and individuals will build up some level of savings earmarked for retirement, travel or college funds. Mechanisms of insurance and takaful 1. The contract mechanism Under the contract of conventional insurance the insurance company promises to pay losses in the event of an insured peril. Many Muslim scholars equate the insurance contract to the sale contract. Muslim scholars opinion on takaful is that it should be based on tabarru (donation). The insured would donate his payments to the company and companies compensate him in the event of calamity with an amount which would assist him and reduce the burden of his loss. Although the function of insurance and takaful is the same, they differ in the intention, principles and transaction. Important aspects of takaful according to the Working committee for the establishment of Islamic insurance in Malaysia:

the company doesn't assume the risk but it is the various participants who mutually cover each other company doesn't have any rights to the takaful benefits all contributions paid by participants will be accumulated in the Takaful Fund all payment of takaful benefits will be paid by Takaful Fund (money credited to the fund can be

invested in areas approved by Sharia) surplus from the operation would be shared with the participants by company company which acts as the mudharrib is entitled to part of the surplus according to a pre-agreed ratio

Under the Takaful system the contribution by each participant should be with the intention of tabarru and not exchange of goods. Self interest motivated by material gain has no place in takaful scheme. Bilateral relationship between the operator and the participants is based on (1) mudharabah (profit-sharing) or (2) wakalah (agency) contract. Mudharabah contract can be divided into (1a) pure mudharabah and (1b) modified mudharabah contract. (1a) Pure mudharabah contract: the operator and participant share direct investment income only and the participants is entitled to a 100% share of surplus

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(1b) Modified mudharabah contract: the investment income is reinvested into the takaful fund and the operator share with the participants the surplus from the fund

There are also two types of wakalah contacts: (2a) pure wakalah and (2b) modified wakalah. 2. Risk management mechanism: (1) Risk control mechanism: when client is known to have a serious illness such as diabetes. Steps need to be taken to minimise claims by suggesting participant to take medical insurance or takaful (2) Risk retention mechanism: insurance or takaful company takes up all claims and has no resource to claim from any third party (3) Risk transfer mechanism: transfer of part of risk to reinsurance or retakaful company (4) Risk sharing mechanism: share the risk with another insurance or takaful company under a co-insurance arrangement Basically there are two types of insurance and takaful products: the life and general for insurance and family and general for takaful. 1. Life insurance products There are 4 major types of life insurance: (1) term, (2) whole life, (3) endowment and (4) investment-linked.

(1) term (or temporary) insurance pays only when death occurs during coverage and no payment at the end of the term. The term is 1, 5, 10, 15, 20 or 30 years. This is the cheapest and can be renewed at a higher premium. Instead of specifying the number of years the policy is stated in terms of age such as up to age 65 or 80. and there is no renewal guarantee.

(2) whole life insurance covers the insured's entire life or very long terms such as up to age 88 or 100. Whole life cash values arise as a by-product of the method selected for paying the premiums. A (2a) straight life contracts is one where premiums are payable as long as the insured lives. In a (2b) limited-pay life policy premiums are paid for a specified period of time such as 20 years until age 65. Instead of paying in instalments the premium can be paid in one lump sum and is called (2c) single-premium life. If insurers terminate their whole life policy before death they will get refund (cash value).

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(3) endowment is similar to whole life, but it provides death benefits for a specified time period. It has

cash values and the policy holder is paid the contract's face value at the end of the protection period.

(4) Investment-life insurance divides the premium into two parts: investment account (belongs to the insured) and risk account (used to manage the fund). In the event of death the insured will get the face amount plus whatever in his investment account at that time.

2. Family takaful products are similar to investment-linked insurance. It has two accounts: the Participant's Account (PA) and Participants' Special Account (PSA) which is based on tabarru. If participant dies before maturity date he will receive whatever he has contributed up to the date of death plus his portion in the PSA including the profits from investment. Products related to insurance and takaful are mostly bank products. Suppose a customer dies before he has finished paying of his loan. Under these circumstances the customer should have taken a Mortgage Reducing Term Assurance (MRTA) or mortgage takaful. Some banks require their clients to take up fire insurance. Bank products like savings or investment products, credit card products, etc. can attach insurance or takaful products. The laws governing the insurance and takaful industries are the Insurance Act 1996 and the Takaful Act 1984. The governing body for both is Bank Negara Malaysia. Differences between the Insurance Act and Takaful Act:

the requirement of Sharia Advisory Council (SAC) under Takaful Act provision of insurable interest in the Insurance act to eliminate gambling elements. Takaful Act is silent

on this under Takaful Act a person below age of 18 and under Insurance Act a person below 16 is under no

capacity to participate in takaful or insurance Takaful Act doesn't require any letters of administration to make payment to claimants

Topic 7 Estate planning and Faraid Summarized by:Ramil Mirkasimov e-mail: ramil.mirkasim@gmail.com HP:017 6900 773 The term estate planning is used to refer to accumulation, conservation and distribution of estate. The purpose is to boost and preserve the financial welfare of individuals and their families. Estate planning includes not only the provision that are made for the devolution of a client's property at death, but also those steps of enhancing general family wealth and its securing while the client is still living. Planning fundamentals:

determine which types of assets to leave behind and to whom decide when he wants the beneficiary to receive the assets compile the assets and estimate the approximate value decide who will manage the assets consider whom he wants to be the guardian of his minor children if he becomes incapacitated or died appoint the representative in making decisions on his behalf concerning his care and welfare (usually) write a will and prepare a trust, appoint power of attorney and health care proxy (sometimes) review his estate plan

WILLS AND TRUSTS

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1. WILL - is the declaration in a prescribed manner of the intention of the person making it with regard to matter which he wishes to take effect upon or after his death (Halsbury's Laws of England). The Will is a written document that forces a person to recognize the people he wishes to provide for. It describes the list of assets and liabilities and their detailed description, executor to effect his wishes, guardianship of minors and rewarding a friend or relative who is not legal heir. Purpose of a will is for the making of dispositions of property to take effect on or after the testator's death and appoint executors to manage or assist in managing his estates. The appointment of an executor or administrator is one of the essential clauses in a will. Testate person is who leaves behind a valid will, otherwise he dies intestate and his estate fall under the ambit of the Distribution Act 1958. A person will be considered intestate if he leaves a will but fail to name an executor. Section 3 of the Probate and Administration Act 1959 provides that the appointment of an executor may be expressed. Wills Act 1959, Section 3, 4, 5 of the Act claims that the will shall comply with the requirements:

(5) testator reached the majority age of 18 (6) testator of sound mind (7) will is written in the language preferred by the testator

The Wills Act requires two witnesses other than the lawful beneficiaries to confirm the signature of testator and that he was of sound mind at time of affixing his signature. The Wills Act doesn't apply to Muslims, inheritance for them is outlined under the Sharia and is administered by the State Islamic Administration Enactments. The Probate and Administration Act 1959, which is applicable for Muslims and Non Muslims, lays down the procedural rules with regards to obtaining the Grant of Probate for the deceased's estate. Petition is non contentious when the deceased has left a Will and named an executor, Order 71 of the High Court will apply. Contentious proceedings occur when the deceased has not left a will and not named an executor, Order 72 will apply and also third parties (creditors) can file a caveat vide Form C to register their interest. Small estate is defined as immovable properties not exceeding RM 600,000. Land Office under the Small Estates Act 1955 is the authority to hear such cases. When a person has died intestate leaving a small estate, any parties claiming an interest can lodge a petition to the Collector of Land Revenue for distribution of the estate. 2. TRUST refers to the legal relationship created by a person when assets have been placed under the control of a trustee for the benefit of beneficiary or for a specified purpose. Its characteristics are (1) the assets constitute a separate fund and are not part of the trustees' own estate; (2) title to the trust assets stands in the name of the trustee; (3) the trustee has the power to manage assets (According to the Hague Convention on the Recognition of Trusts). Trusts are usually created for the education, maintenance of children, aged parents, and disabled dependents and for benefit of charities. Elements of Trust:

time of coming into being of trust relationship duties connected with the office of trusteeship remedies

Types of Trust:

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1. Express trust: (1) public (charitable) trusts and (2) private trusts which are divisible into (2a) fixed and (2b) discretionary. The purpose is to benefit fixed people in a particular class

2. Implied trust 3. Resulting trust 4. Constructive trust: doesn't require formalities for its creation 5. Trust funds in the higher sense: cover governmental obligations

Power of attorney is an instrument created by the person granting the power of attorney (Donor) in favor of a people named by Donor in the instrument (Donee). The purpose is to grant the Donee with the authority to represent the Donor in certain transactions with regards to the Donor's affairs as if the Donor himself is carrying out all the acts the Donors intends to effect. It can be (1) general (Donee is fully authorized to represent the Donor in all matters) and (2) specific (Donor specifically mention which area of representation is required) by nature. Most power of attorneys is specific. Tenor is restricted by a time period. The instrument may be revocable or irrevocable. The requirements for registration are specified in Section 4 and 9 of Power of Attorney Act. Representative is a person appointed to act on behalf of the others person. May be known as personal representatives, executors or administrators. Part V of the Probate and Administrator Act details the powers, rights, duties and obligations of representatives. Duties of representative in the Administrator of Estate are outlined in Part VI of the Probate and Administrator Act. Beneficiary means a person or body of people, corporate or incorporated those benefits as a result of a Will (According to Selangor Wills Enactment 1999). Non contested beneficiaries are named by the deceased in the will. Contested beneficiaries (who may challenge the will if there is no adequate provision): spouses, unmarried daughters, infant sons and mentally or physically disabled minors. Beneficiaries entitled to receive property:

children, including illegitimate and adopted mental patient Protective Trust which protects the property to the bankrupt beneficiary pet animals Organizations such as clubs, societies irrespective of whether they are charitable or otherwise.

Rights of beneficiaries:

remove an executor on the basis of fraudulent acts examine the accounts of estate ensure that the investment made was upon due diligence Ensure that executor makes choices of preference would not jeopardize the interests of estate and

beneficiaries. Laws related to estate management:

Presumption of Survivorship Act 1950 Small Estates Act 1955 Distribution Act 1958 Probate and Administration Act 1959 Wills Act 1959 Inheritance Act 1971 Trustee Act 1949 Public Trust Corporation Act 1996 Labuan Trust Companies Act 1990 Trust Companies Act 1949

Faraid as a foundation of estate planning.

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Faraid means something that has been predetermined. From Quran (4:7) From what is left by parents and those nearest related there is a share for men and a share for women, whether the property be small or large, a determine share. Prophet saw encouraged us to study faraid because of its importance. According to a classical interpreter of the Quran, Imam Ibn Kathir, there 3 main verses that explain the laws of distribution (faraid, law of inheritance): 11. 12 and 176 verses of 4th chapter which explain in detail the portions inherited by mother, father, wife or husband, brother and sister. Eligible heirs: (1) On the male side:

son son's son and agnatic descendants father father's father and agnatic ancestors brother brother's son except in the case of a son of a uterine brother father's full and half brother son of above surviving husband, not divorced nor repudiated

(2) On the female side:

daughter son's daughter and other female descendants of a son mother grandmother sister surviving wife, not divorced nor repudiated

If the eligible heirs are present only the husband/wife, father, mother, son and daughters are eligible, while the rest are excluded from the inheritance.

3 tenets of inheritance: (1) deceased: death of deceased must be either certain or pronounced by court

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(2) heir: must be alive at time of death of the deceased and relationship is known. There are 2 types of relationship: (2a) by marriage or (2b) blood relations

(3) estate: Baitul Mal may inherit the estate whenever there is a balance after distribution to the various eligible heirs.

2 things impede inheritance (eligible heirs are not entitled to the estate): (1) if a person kills his father in order to inherit his father (2) difference of religion

2 types of exclusions:

(1) mahrum: the heirs are barred from inheritance although they are eligible (2) mahjub: heir is excluded from inheritance because of another heir who is nearer in relationship.

Jabari's rule for determining of nearness:

(1) first to order (2) next to degree (3) lastly to the strength of the blood tie

The shares in estate distribution are determined by verses 11 and 12 of Surah An-Nisa (Chapter on Women): Quranic Heir Share Conditions

(1/2) If the wife does not leave children Husband

(1/4) If the wife leaves children

(1/4) If the husband does not leave children Wife

(1/8) If the husband leaves children

(1/2) If she is the only child Daughter(s)

(2/3) If there are 2 or more daughters and no sons

(1/3) If the parents are the only survivors Mother

(1/6) If only mother is alive

Father (1/6) If only father is alive

Topic 8: Retirement Planning by: Shakirah Saibon- HP0123007430 Definition RP is a comprehensive analysis of the tax-effective strategies which are available to assist you in achieving your goals for retirement. RP goal is to coordinate the financial resources available so an individual can plan for financially secure retirement. RP process includes a comprehensive review and analysis of your assets, liabilities, savings patterns and investment strategy in the context of timing of your retirement, retirement income and your tolerance for investment risk.

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SIX STAGES OF RETIREMENT PROCESS

1) Setting of retirement plan goals Formulate retirement goals (specific, realistic and measurable i.e. the amount required and the

time parameter. Determine the lifestyle desired in retirement Priorities for planning are established i.e. date of retirement, lifestyle change, risk tolerance,

planned employment after retirement, if the need may arise. 2) Based on step 1 and 2, a person should be able to: - determine savings required and if sufficient assets available to meet the retirement income needs. - If assets are not available, a savings program is developed to cover the short fall. - If the saving program is not realistic, go back to step 1 to re-evaluate needs and priorities. Forecasting a person's income needs in line with the type of retirement or lifestyle he desires is VERY IMPORTANT.

TWO METHODS of computing a person's future income needs:- a) Replacement Ratio Methods b) Expense Method

a) Replacement Ratio Methods Advantages Disadvantages

Simple to calculate The figure might be excessive in future value

Easy to relate to There may be some inaccuracies in

variables used (e.g.: rate of salary increment)

The standard rate of living assumed can be reasonably accepted

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Assumptions: Changes in the cost of living will be reflected by changes in the individual's income The post-retirement income needs can be estimated from the individual's pre-retirement income Standard of living prior to retirement is therefore the determining element in the standard of living

post-retirement b) Expense Method

Construct a budget for post-retirement living, that consists of: - Housing costs - Food - Clothing - Medical expenses, etc Advantages Disadvantages

More accurate in determining retirement needs

It is a tedious exercise to compute the final figure

May be more convincing as actual costs are being worked out

Some assumptions may not be accurate i.e. not all expense item inflate at the same rate

Tendencies to miss out some peculiar expense item which may not be obvious in the present times

3) Analyze Information and calculate savings needed to meet the objectives

Calculation of retirement fund, in order to meet the objectives is based on: Various funding sources The workings of current asset / future cash flows Time value of money

Work out on: a) Determination of required amount for retirement goal, info needed:

A cash flow statement showing the client's current annual sources and uses of cash An annual budget listing present income and projected income at retirement Review all available assets that will be utilized to meet retirement needs. On the worksheet, list out the categories of asset that will be valued:

- Real estate: determine the value taking consideration of inflation rate and appreciation value based on location factors, RPGT.

- Investment Assets: currently owned which will be sold during the retirement. It includes unit trust funds or stocks and bonds or equities in non-listed companies.

- Retirement income sources i.e. EPF, pension or annuity. This include, deferred compensation payment, monthly income from company sponsored plans or Trust etc

- Savings program: Fixed deposits, Wadiah account, Amanah Saham Bumiputera(ASB), Tabung Haji, Cash value from Takaful or insurance.

b) Calculate the future value amount of current funding vehicles-rate of return would vary. o EPF o Endowment policies o Shares o Properties and other invested assets, which are used to fund the amount in (a)

c) Analyze results: (b) > (a) sufficient funds to fulfill the retirement needs (b) < (a) short of funds review the client's financial health - meet the shortfall

Other factors need to be considered: Long term assumed inflation rate Duration of time before the retirement date

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How many years to project the retirement Income tax rate before and after retirement After tax return on each investment

4) Plan the distribution, ascertaining the best method to distribute that is the best Consideration of Time value of money

Priorities Risk tolerance

TWO METHODS a) Capital Retention / Principal Intact Method b) Capital Liquidation Method

a) Capital Retention / Principal Intact Method-calculation refer page 276.

This method is apply when there is a sufficient accumulated capital which can generate investment income

The preferred method as the retiree would not have to worry about outliving his savings b) Capital Liquidation Method-calculation refer page 277.

This method is apply when the capital accumulated is not sufficient to serve his retirement days

The earnings as well as the principal would have to be distributed over the estimated lifespan.

5) Implement the plan Involve gathering other professionals (e.g. lawyers, insurance agents, tax consultants)

6) Review the plan Revision should be made at least annually to ensure:

- Goals are being met - Make any necessary changes

NON-FUNDED "SAFETY NETS" Aids from government Aids from Non-government org Extended family Concept (support

From children)

INVESTMENT STRUCTURE FOR RETIREMENT The financial needs should not transgress what is dictated by Islam. The satisfaction of these needs should adhere with the teachings of Quran and Sunnah and therefore, gaining Allah's blessing and barakah.

RIBA forbidden Investment structure must not involve in Riba transactions. It must be channeled through various Islamic investments that available in the financial market.

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Risk vs. Return

Risk factors

Islamic view on risk management

Risk must be managed properly. Islam encourages actions and planning to mitigate risk before leaving it in the fate of God. Islam does not forbid its Ummah to invest but encourages savings and investment for the future. Proves: 1) Quran: (12:67) and (12:47) 2) The story of Prophet S.A.W emigration also tells us how prophet S.A.W took steps through proper

planning using Risk management techniques. Prophet S.A.W reduced the risk of getting killed by asking Ali to sleep in his bed during the night of emigration

Portfolio theory applied to retirement planning

1) Modern Portfolio Theory (MPT) - concept of diversification as a tool to lower the risk of the whole

portfolio without giving up high returns. The key concept is BETA (Variance)

- a measure of how much a financial instrument such as changes in price relative to its market, i.e. stocks moves 2% on average, when the KLCI moves 1% would have a beta of 2.

- A measure of investment riskiness. The higher the absolute value of Beta, the riskier the investment.

This theory constructs portfolios where stocks with different +ve and ve Betas are mixed to give a portfolio with minimal Beta for the whole group.

Capital Asset Pricing Model (CAPM)

- used to select investment for a portfolio. - Using Beta and the concept of risk-free return (e.g. short term US treasuries, government

bonds) - Used to calculate a theoretical price for potential investment. - An attractive candidate for portfolio - If the potential investment is selling for less than the

price.

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Criticism against MPT:

- The concept of Beta: no way to know what its Beta will be going forward. Therefore, it is in fact impossible to build theoretically perfect portfolio. This objection has been supported by various studies illustrating that portfolios constructed with MPT do not have lower risks than other types of portfolios.

- MPT also assumes that it is possible to select investments whose performance is independent of other investment in the portfolio. Market historians have shown that the instruments in fact behave as if they are related.

2) Diversification- core concern of portfolio theory - A portfolio that is invested in multiple instruments whose returns are uncorrelated will have an

expected simple return which is the weighted average of the individual instrument's returns. - Key strategy in minimizing the risks of investment especially to reduce the concentration risk. - "Don't put all your eggs in one basket" - Risk diversification in Quran (12:67) where prophet Yaakob advised his sons to enter the

gates of Egypt via different gates

3) Taxation The choice of investment for retirement funding can be affected by current tax regime i.e. Malaysia - Income tax 1967, RPGT Tax act 1976, Sales Tax Act 1972, Service Tax Act 1975

Tax advantages according to each asset class :-

a) Equities - No capital gains tax for buying and selling of shares in Bursa Malaysia - Dividends declared by listed companies to shareholder are taxed at source at the flat corporate rate

of 28%. After deducting this tax at source, the shareholders will receive the net balance. - If shareholder inc tax bracket < corporate rate, he can claim for a tax refund or credit. b) Property - RPGT is levied on gains derived from the disposal of either real property situated in Malaysia /

shares in closely controlled companies with substantial real property interests. - Malaysians are entitled to the election of an exemption, once in a lifetime, from RPGT when

disposing a private residence. - No RPGT after 6th years. - Property rental income is taxed part of the income tax. But if the property is financed with a loan,

tax relief can be claimed on the amount of interest paid for the loan prepayments. c) Unit Trust

- Realized gain from a) the investment fund (not taxable) b) properties (RPGT)

d) Cash and Fixed Deposits - Interest other than exempt interest paid to resident individuals by approved FIs is

subject to withholding tax at 5%. e) Life insurance and Takaful products

- Death coverage on own life, policyholders are entitled to a relief of RM5000 per annum(inclusive of total contributions made o EPF)

- Medical coverage/children education purposes (relief RM 3000 per annum)

4) Asset Allocation is the process of determining optimal allocations for the broad categories of assets invested in one investment fund.

- The choice of allocation will depend on the following factors: a) Time horizon b) Risk profile

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c) Taxation Property as an asset class- one of the most popular investment for retirement because :- more tangible,

less risky, satisfying feeling of ownership, income from rental, capital appreciation, demand is always there.

- Characteristics a) Types of return : i- capital appreciation

ii- regular rental b) Level of returns- depends on location c) Leveraging tool buying a property via a bank loan

- Consequences i) multiply his return ii) multiply his losses

- Risks in property mkt:- a) Market risk b) Specific risk c) Financing risk

RETIREMENT SCHEME Types of Retirement:- 1) Pension scheme pension s a regular payment made by the state or a former employer to a person who no

longer holds office due to retirement or disabled. a) Defined contribution pension scheme - Both employee and employer contributed a defined amount of

contributions to the funds. - Also known as "money purchased pension scheme" - Can be defined as % of the salary or on a fixed lump sum. - If stipulated in the service agreement or allowed by law, the fund is portable where

new employer can continue with the same scheme. b) Defined benefit Pension Scheme - pension benefit is pre-determined at the inception with

consideration of the post retirement standard of living of retiree.

PROVIDENT FUND AND OTHER RETIREMENT FUND SCHEMES 1) EPF Compulsory saving known as KWSP under EPF Act 1991. Aiming to provide a measure of security for old age retirement. Savings are made in form of monthly contributions credited into his EPF account. 2 contributions from the employer12% and the employee11 %( the latest is 8%). Three types of accounts (Account I-retirement at age 55, Account II-housing and education at age 50, Account III- health and medical critical illness) serve different types of purpose.

STREAMING RETIREMENT INCOME Definition

o Income stream is simply a term used to cover any range of products that bring forth a steady stream of income.

o Vehicles providing the income streams :- Pension

Govt servants receive a monthly pension after retirement, calculated as a percentage of a last drawn salary. In the event of death of the retiree, pension continues to be paid to the deceased spouse

EPF 1) At age 50- Retiree may make partial

withdrawal of up to the balance standing in his account II

2) At compulsory retirement age 55- lump sum withdrawal of the whole their balance.

Annuities

Lump sum amount which is invested to give Fixed Deposit Income

For low risk tolerance, returns are low about

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returns. Payment are made in small sums based on the lump sum initially invested usually manage by insurance company. Two Types: -Immediate annuity makes regular payment usually within about a month - Deferred annuity allows the owner to take part income while investing the rest.

3% per annum. Also known as Mudharabah Investment Account and fixed term investment which is based on commodity murabahah.

Income from unit trusts/mutual funds Managed funds that claim t spread the risks as compared to direct investment in equities market. Invested in a basket of shares following the investment strategy of fund managers.

Income from shares Can be multiple income streams. Income and capital appreciation obtained normally from quality stocks. capital gain is not taxable. Now, we have Islamic Indexes listed by DJIM, FTSE and SC.

Takaful/Life Assurance - Topic 6

Health Insurance -Topic 6

Income from properties Rental income although is subject to tax, it is a good guarantee in consistent income stream. -Capital appreciation -RPGT exempted for property >5yrs

Discounted Cash Flow(DCF) Calculations-refer page 312&313 Conclusion The main important point is to know the 6 step processes in retirement planning and all the structures of investment must be free from the prohibited elements involving riba, maisir, wine, pork, gharar, and so on, means that they must encompasses Shariah Principles. A well designed retirement system either construct by government or private entity should encompasses four elements: retirement income, stable payments, a safety net and the ability to save.

Topic 9: Taxation Planning and Management Summarized by: Nur Khadtijah. 012-2055744

A) Introduction (WPM pg 317)

Issue : Tax payers' compliance to tax laws Solution : Must have measures to strengthen compliance Taxation system - Purpose : for tax administrators to maximize revenue collections - Results in : lowering collection costs & improving tax compliance among taxpayers Self-Assessment System (SAS) - introduced by Malaysian Government in 2001 - Purpose: establish effective tax governance system - Feature: reduced time lag between lodgment of tax returns & case finalization - Results in: shift from routine assessment to more critical areas (audit, investigation and taxpayers

services) - Covers all taxpayers sole-proprietor, partnerships, cooperatives, companies, salaried worker

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B) Criteria for Tax System Evaluation (WPM pg 318)

- Effective Tax system involves effort to achieve maximum output Economic perspective: a. Administrative Simplicity: Inexpensive to administer b. Flexibility: Respond easily changes in economic condition c. Transparent: Tax burden easily ascertainable d. Economic Efficiency: Efficient allocation of resources

__________________________________________________________________________________________

C) Comparative Tax Rates in Asia-Pacific Countries (WPM Pg 320)

Country Corporate Tax Rate (Jan 2005)

(%)

Commentary

Japan 42 - Corporate Tax:

a. Corporations with paid-in capital in excess of Y100mil = 37.5% b. Corporations with paid-in capital of Y100mil or less = 28% c. First Y8 mil of annual taxable income = 37.5%

China, New Zealand

33 New Zealand: - Efficient Goods & Services Tax (GST) system. GST Rate = 15%

Australia, Bangladesh, Brunei, Indonesia, Myanmar, Papua New Guinea, Thailand

30 Thailand: - Corporate tax rate imposed on Co.s net profit = 30% - Small company with net profit < Baht 3mil or RM 272k = 20% or 25%

Principles Attributes 1) Certainty - All tax liabilities should be certain, definite and predictable

- Public Rulings & guidelines (by Inland Revenue Board (IRB): b. to inform & clarify tax laws c. to give interpretation of tax laws and practices of the revenue authority d. guide taxpayers and practitioners to comply with laws in computing tax e. Priority for topics requiring explanation: - transfer pricing rules - ascertainment of bad debts (allowable as a deduction under Income Tax Act (ITA) f. Reduce uncertainty, promote uniformity, increase transparency and enhance compliance

2) Fairness (Equity) - Burden of tax should correspond to benefits received by taxpayer - Horizontal and vertical equity

3) Efficiency - Tax laws will not influence economic decisions - Tax should not unnecessarily distort or modify choices

4) Simplicity - Tax system: fair and non-arbitrary administration, understandable - Minimum compliance & system administration costs

5) Flexibility - System can be varied easily to have immediate impact in achieving econ objectives - Fundamental guiding principle of all tax policies should be its neutral stance

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Malaysia 28 Corporate Tax rate - Complements: a. tax exemptions on increased value-added products b. availability of pioneer status c. investment tax allowances d. imposition of indirect taxes Small and Medium Scale Companies (SMEs) - SMEs with paid-up capital of RM2.5mil and below: a. 20% on chargeable income of up to RM500,000 b. 28% on chargeable income > RM500,000 - Raising chargeable income resulted in increased tax savings

Singapore 22 - Corporate tax for year of assessment 2003 = 22% (unless qualified for tax exemption or concessionary rate, usually 10%) - Since 2002, Singapore Govt. grant partial tax exemption for chargeable income: a. three-quarters (75%) of first SGD$10,000 b. one half (50%) of next SGD$90,000 - Current GST rate = 5%

Hong Kong 17.5 - Standard Profit tax rate = 17.5% (year 2003/04 assessment) - Tax rate for unincorporated businesses = 16%

Others India: 36.75%, Pakistan, Sri Lanka: 35%, Fiji, Philippines: 32%, South Korea: 29.7%, Taiwan: 25%, Vietnam: 25/32%,

Malaysia vs UK Tax 1. - Malaysia:

a. ITA definition of allowable deductions for business expenses is narrower b. Only all expenses incurred during the period in production of income

2. - UK: a. c. allows any expenses wholly and exclusively lay out or expended for the purposes of the

business (sec 137) b. expenses in production of income during the period + expenses associated with maintaining

and enhancing earning capacity of business __________________________________________________________________________________________ D) Sources of Tax Revenue (WPM Pg 322)

1. Direct Taxes- corporate, personal income, petroleum income, and other direct taxes 2. Indirect Taxes 3. Non Tax Revenues- Investment income, licenses, permits, registration fees, service fees,

petroleum royalties and gas payments fine and forfeitures __________________________________________________________________________________________

E) Scope of Income Tax (WPM Pg 324) - Scope: limit or parameters within which income would be taxable in a country - Income Tax = charged upon income of any person / entity - must be verified against receipt of income nature Malaysia - Income accruing in or derived from within Malaysia or received in Malaysia from abroad would be subject to

tax (sec 3 ITA) - But foreign income received by Non-resident exempted - Since 2004, income remitted into Malaysia from abroad exempted __________________________________________________________________________________________ F) Scope of Taxation (WPM Pg 325)

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- Territorial & Remittance scope: Income within Malaysia or received from abroad subject to tax (sec 3 ITA) Considerations for taxability of income: a. Residence Status - by no. of days an individual is present in Malaysia (quantitative test) b. Classes of Income - Classification should not be limited to exclude other income c. Exemptions - provided on a range of income __________________________________________________________________________________________

Item Section Description Employment Income (Chargeable to tax under Section 4(b) ITA)

13(1)(a) Income

- wages, salary, remuneration, leave pay, fee, commission, bonus, etc. a. Benefits convertible to cash: - employers may issue employees shares or grant options to purchase sha