Where to invest

2014-04-29 08:00

The best investment options for your extra cash

Srikanth writes:

I have R10?000 available for investment each month, but have no idea what to do with it. Please can you advise me on the various investment options available?

Liberty financial planner Phillip Kassel replies:

The first option I would recommend is unit trusts. This is a popular investment that comes with varying degrees of risk and therefore varying degrees of returns.

The returns are typically a combination of interest, capital growth, and dividend and bonus declarations, depending on the unit trust portfolio you select.

If you choose to invest via a linked investment service provider, there is usually a financial adviser available to monitor the investment on an ongoing basis. The fee is usually about 3% a year, levied monthly on each contribution.

You have to take tax into account. If the investment is primarily equity or share based, you will have to pay capital gains tax on the growth as well as dividend withholding tax on disposal of the investment.

You can access your money within 72 hours and there are no penalties levied.

Different unit trust funds have different minimum monthly investments, starting from as little as R50 a month.

Your second option is a traditional five-year investment or an endowment policy. There are limits to the contributions you make. For example, you cannot increase the premium by more than 20% a year on a rolling 24-month cycle.

There are also reducing-scale penalties on early withdrawal within the first 60 months. These penalties start at 15% of the investment value.

However, the advantages include the following:

1. An endowment policy does not form part of your estate. So, if you die within the first five years of the investment, the proceeds are paid tax-free to your nominated beneficiaries within a week.

2. If you are investing R10?000 a month, you will receive a discount on management fees.

3. At the end of the initial five-year term, the contract is automatically extended. But if you require access to your funds at any point thereafter, you will not pay any withdrawal penalties.

4. The minimum monthly investment amount required is R500.

5. There is a tax advantage if your average tax rate is more than 29%.

City Press replies:

It is important that whatever investment structure you choose, the underlying assets match your investment term. For example, if you are only planning on investing for two or three years, you would select a lower-risk asset class such as an income fund or low equity-balanced unit trust fund.

If you have a longer investment horizon, you would consider a unit trust that is invested in equities (shares on the JSE) only.

Learning the ropes

Investment seminars

Sebobe writes:

Consultants from the London School of Investment have been inviting me to attend a presentation about investing on the JSE.

They are selling their software for between R14?900 and R19?500, and claim that after their training presentation, I will be equipped to trade (buy and sell shares) directly on the JSE.

The training will only be provided once I have paid them the money. Is this a scam? Please advise as I am tempted to invest.

City Press replies:

You can learn a lot from a reputable investment school, but all too often people find it difficult to absorb so much information in one sitting.

You end up paying a lot and then lose money when you start trading.

They might also tie you in by insisting you trade through their platform for a monthly fee. This can start costing quite a bit if you are not trading enough to offset those costs.

A better option might be to set up an account with a local online trading platform, where you can receive ongoing assistance.

Many online brokers, such as PSG Online, iTrade and Globe Trader, provide education and simulated trading for beginners.

Both FNB and Standard Bank also offer online trading for beginners at relatively good prices.

Taking on more debt

Poor credit record?

Kodibane writes:

I want to buy a car, but I have a bad credit record. What can I do?

City Press replies:

Unfortunately, if you have a poor credit record, borrowing money will be very expensive.

If anyone is prepared to lend you money, it will cost you around 33% a year in interest and your car would cost you double by the time you paid it off.

You can try to either improve your credit record by settling your debts, or saving up cash for a basic second-hand car. This would definitely be the most sensible decision. Taking on car debt will only worsen your financial situation.

There are companies that run “rent-to-buy” schemes, where you rent the car and at the end of the period you own it.

This is aimed at people with poor credit records. But be warned, these schemes also come with high interest charges.

If you are unable to pay the rent for just one month, you would lose the car. The positive is that you don’t owe anything further on the car if you can’t meet the payments.

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