Is Capitec a good buy?

2012-10-27 12:35

In this month’s letters, readers were mostly interested in the topic of where to invest their money.

Deciding where to invest is not just about ‘the best return’ but also about investing to meet a certain goal.

Make sure your investment matches your goal and that you have several savings and investment strategies to meet all your needs, such as emergency savings, children’s education, a deposit on your home as well as retirement

Oliver writes:
I’m sitting with some cash and would like to invest it so I can get good returns on it. I have no knowledge of the investment game, but I am looking at a long-term investment.

I’ve noticed the buzz around Capitec Bank shares and I would like to ask you if it would be a good idea to buy some of these and just let them lie for a decade or two?

Maya replies:
I’m not clear if this is your only investment. If it is, then investing all your long-term money into one share is a risky option.

Capitec has performed extremely well, hence the “buzz” in the market. You should certainly invest with them rather than borrow from them.

However, one also needs to be careful when buying shares in a company whose value may be inflated due to market hype.

It will be more difficult for Capitec to repeat its past performance as it is now a much larger company, and has to remain innovative and competitive in what is becoming a very challenging space.

Capitec’s main business remains lending, especially micro-loans, and there are fears consumers have become over-indebted.

This, in turn, raises the risk of an increase in bad debts (people not being able to repay loans). Capitec manages their book extremely well, but the risk remains.

In terms of the broader issue of where to invest your money, you should aim for a diversified portfolio with several shares. This reduces the risk of something going wrong if you invest in just one company.

This can be obtained by investing in a unit trust or an exchange-traded fund that invests in a range from 20 to 40 shares.

If you would rather have your own share portfolio, then consider using FNB’s Sharebuilder, which gives you access to 22 of the most popular companies on the Johannesburg Stock Exchange (JSE).

You do not have to be an FNB client to access these services. Because there are a limited number of shares available, it makes it easier to choose the shares you like most.

FNB provides detailed, easy-to-understand information on each share. You can invest for R500 but, given the minimum and annual fees, you would want to invest R3 000 to R5 000 per share.

You should only follow this route if you have at least R20 000 to invest so that you can buy at least five different shares, providing some diversification.

There is an upfront fee of 2% that includes all your costs, but with a minimum fee of R50, you will pay R50
for any trade up to R3 000. There is a monthly management fee of R17.

Once you are comfortable with investing, you can migrate to FNB’s Share Investor Platform, which allows you to invest in the full range of shares.

Standard Bank’s Auto Share Invest allows you to invest with a R500 monthly debit order.

Every month you invest R500 or more and on the 25th of each month Standard Bank will buy the shares you have chosen from their range of selected shares, which include the 40 most popular shares listed on the JSE.

The costs are about R25, which works out to 5% on a R500 investment. This means the share price must first increase by 5% before you are making money.

However, the higher the monthly amount you invest, the lower the flat fee becomes as a percentage of the invested amount.

Are RSA Retail Bonds a good bet?

Peter (65) asks:
Are RSA Retail Savings Bonds still a good choice of investment over a three- to five-year period? And what interest rates are they currently offering?

Maya replies:
If you are simply comparing interest rates to a bank deposit, then the RSA Retail Bond is compelling, with 7% for five years and 6% for a two-year investment.

You must, however, remember that even in retirement you have many years ahead of you and your money needs to stay ahead of inflation, which currently is just below 6%.

In fact, for retirees inflation is expected to be closer to 7% as medical costs make up a higher percentage of monthly spend.

You need to have a balanced portfolio that includes some growth assets, especially shares that have a good dividend payout that can generate income.

Why can I not cash in my retirement annuity?

Tommy (48) writes:
I have a retirement annuity with Sanlam, which has been paid up since 2008. In 2009, I became unemployed and am still unemployed for reasons beyond my control.

I applied for termination of the retirement annuity in order to get access to the funds, but Sanlam is refusing to give me access to my own money on the grounds that legislation doesn’t allow them to terminate a retirement annuity until I am 55 years old, which is still seven years away.

I need advice in order to resolve this matter. The money in the retirement annuity belongs to me, not Sanlam or the government.

Maya replies:
You have raised a very important point and one that many investors in a retirement annuity may not be fully aware of.

It is certainly something to consider before taking out a retirement fund.

The government provides a tax incentive to save into a retirement annuity and in exchange for that tax incentive, you are required to keep those funds for retirement.

Therefore, Sanlam is correct in its reply to you.

As part of the pension fund reform process, the National Treasury is considering various changes to the legislation.

It plans to increase preservation so that individuals are unable to cash in their pension or provident funds when leaving an employer.

However, part of that process will allow for individuals to access a portion of their funds in case of hardship.

It is most likely that this will be paid out as a monthly income rather than a lump sum. This is still in discussion phase andwill most likely only come into effect by next year.

Cash in case of emergency

James writes:
As part of one’s personal financial plan, I believe in having three to six months’ living expenses saved up and easily accessible in case of emergency.

My wife and I have saved extra funds into our mortgage bond and estimate that the value of the additional capital we have paid off is worth around 21 months of current living expenses.

I see that as part of our emergency fund.

How likely is the bank to cancel or limit an access facility?

If it is a likely risk, I’d rather withdraw three to six months’ living expenses and transfer it to a separate savings account.

Which option would you recommend?

Maya replies:
Personally, I prefer to have my emergency savings separate from the paying off of my bond as my bond money should be there to serve a different purpose from that of my emergency savings.

I have four months of living expenses in a money market account, but I also pay extra into my bond.

Sometimes it is better to have separate goals so that you know exactly where you stand financially.

If your goal is to have your house paid off by a certain date, then tapping into that for emergencies will adversely affect that goal.

However, this is a personal decision and I have certainly never heard of a bank cancelling an access bond, so you should have access to your funds if you desperately need them.

I just hope that in addition to paying off your bond you also have long-term savings.

Don’t mix up the goal of paying off your house with long-term

retirement savings. Remember you can’t eat your house during retirement!

If the market returns 12% over the next 20 years (and historically it has been between 15% and 18%), aggressively paying off your mortgage is not necessarily the best long-term investment.

That said, reaching a point in your life in which you can start the month with no payments due on your home is a good financial goal – but it is about finding a balance. Just make sure you are on track with your retirement savings as well.

Save 15% for retirement

Kgaugelo writes:
I am a 22-year-old single mother of one and recently my company employed me on a permanent basis.

I currently earn R8 000 per month and contribute R800 towards the company provident fund.

In addition to this, would you advise me to contribute towards a retirement fund, or does the company provident fund cover that?

Also, if I wanted to contribute on the side towards my retirement, what options do I have? What happens if I change employers later on?

Maya replies:
Rule of thumb is that you should save 15% of your salary for retirement, so technically you could increase your retirement provision to R1 200 a month.

You can either increase your contributions through your company’s provident fund, which is the cheapest option, or take out a unit trust-linked retirement annuity.

Your retirement annuity is independent of your employer.

However, only increase your retirement savings if you have no short-term debt like a car or credit card.

The best gift you can give yourself and your child is to be (and remain) debt free. Make this your first goal and then start to commit to savings.

Before adding more to your retirement provision, I would recommend that you first build up an emergency fund of at least three to six months of living expenses.

As a single mother, you need to have emergency cash so that you are not forced to take on debt unexpectedly.

Also, start putting money away in a balanced unit trust for your child’s education as this will be a major cost in later years.

In terms of your retirement goals, I would suggest that you build this up slowly by increasing your contributions by 10% each year.

So next year you will contribute R880 per month and then R970 the following year and so on until you reach a point where your contributions are equal to 15% of your salary.

This will allow you to meet all your savings goals over time.

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