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Sunday, January 9, 2011

Investment Options for OFWs (Part I)

Most of us (OFWs) are always thinking of other ways to earn additional income to assist our salary with the expenses. Many are thinking of putting up a business for the family way back home in the Philippines. Unfortunately, many failed and the business goes nowhere. Well, what would you expect for a business that was not properly planned? This has been a common mistake for most OFWs. Most of us think that putting up a business is the best investment option to have.

However, there are many other investment options available for us. Only that most of us are unaware of those kinds of investments. These kinds even doesn’t require big amount to start with and are considered low to medium risks investments.  In this entry, I will try to elaborate some of these investments (as I am aware of) with some important information for each. To have a sort of comparison, I will classify those by the rate of Risk and Yield.  Always remember the principle in investing… “Higher Yield means Higher Risk”. So, before you decide to enter to any of these investments, it must be important that you are aware of all the PROs and CONs for each. Also, another important rule “Invest only the amount of money that you can afford to lose”.  Always put in your mind that the money you put in any investment will ALWAYS BE AT RISK.

As a start of this series, I will first tackle Low Yield / Low Risk investments. These are the recommended ventures if you’re considered as a beginner.

1. Time Deposits to Banks
Yield Rate: Low
Some important information:
  • Rates are ranging from 1.5 % to 3.5% p.a. depending on the term and amount. Also varies depending on the Bank offers. There are some Banks that offer special rate for OFW account which are a little higher than the regular TD account.
  • Maturity amount is subject to 20% withholding tax and 0.50% documentary stamps tax (1 peso in every 200 pesos).
  • Time deposit account in US Dollar is subject to 7.5% tax on the maturity amount.
  • Terms vary from a minimum of 30 days to maximum of 360 days with option for automatic rollover.
  • Contact or visit any branch of your Bank of choice for their latest rates and any other inquiries.
Sample Computation 1:
Rate: 1.5% p.a., Amount: 50,000, Term: 30 days
Formula: [(Principal Amount * Rate * Term) / 360 ] 
= 50,000 x 1.5% x 30 / 360 = 62.50 (Gross Interest) Less 20% Tax = (12.50)
Net Interest = 50.00
Total Amount on Maturity (Principal + Net Interest) = 50,050.00
Sample Computation 2:
Rate: 2.5% p.a., Amount: 500,000, Term: 90 days 

= 500,000 x 2.5% x 90 / 360 = 3,125 (Gross Interest) Less 20% Tax = 625.00,  Less Doc. Stamp = 15.625 (*sometimes Doc. Stamp charge is waived by the Bank)
Net Interest: 2,484.38

Total Amount on Maturity (Principal + Net Interest) = 502,484.38

Risk Rate: Low
  • It is considered Low Risk because it is covered by PDIC. But, be it clear that the maximum of 500,000.00 covered amount is the TOTAL amount of ALL the accounts you have on that BANK and NOT per account or per branch.
  • Also, consider the reputation and stability of the Bank where you will invest your money. It’s recommended to place your money to some Commercial Banks which has been in the industry for long period of time. The drawback of this, they offer lower rates (a matter of decimal to 1%) compared to some other types of banks like Savings, Thrift, and Rural banks. So, your judgment depends on your choice between (higher stability but lower interest and lower risk) versus (lower stability but higher interest and higher risk).
  • This is considered LOW RISK investment and is available almost anywhere.
  • You can start with small amount for as low as PHP 5,000.00. (vary from Bank to Bank)
  • You can withdraw your money during time of emergency. The Bank however applies a penalty on the rate for pre-terminated account (Some banks apply a Savings Account Rate with accompanying conditions on the holding period). Terms and conditions in this aspect varies within Bank's own policy.
  • Some Banks offer online facility wherein you can monitor the movement of your account though internet.
  • This type of investment has LOW YIELD rate. As a saying goes “Hindi ka yayaman dito”.
  • Some considered this venture as a safe keeping option.
  • In the event that he Bank will close, only a maximum of 500,000 of total amount will be covered. Then consider the time it will take for you to have your claim released.
Bloggers Note:
To be fair, I did not mention any name of the Bank within this post. 

2. Government Securities

Yield Rate: Low 
Some important information:
  • Rated range is 5% - 10% p.a. interest / pay-out quarterly
  • There different types of government securities depending on the minimum amount required and the terms.
A. RTBs – Retail Treasury Bonds
The Retail Treasury Bond (RTB) is a fixed-income instrument issued by the government as a way of raising funds. Since it is backed by the Philippine government, it is generally considered a safe and liquid investment opportunity. The minimum amount to invest is only 5,000.00 why it is considered as Retail.

Source: http://www.pinoymoneytalk.com/rtb-philippines-september-2009/

B. Treasury Bonds
Treasury Bond is similar to RTB, only that it has higher minimum amount which is 100,000.00.  Both the RTBs and TBs are considered as long term investment which are ranging from 3 – 5 years.

C. Treasury Bills (T-Bills)
Treasury Bill has the same minimum amount of investment with Treasury Bond which is 100,000.00. The difference is with the term, wherein T-Bills are short-term ranging from 91,182 and 364 days term. Also, T-Bills has lower rates compared to RTBs and T-Bonds but are all subject to 20% withholding tax.
Risk Rate: Low *
They are considered LOW RISK because they are guaranteed by the Philippine Government. Also it can be traded on the secondary market.
More details will be available on the next post….
(To be continued…..)

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