Where to invest

2012-02-18 12:11

When we talk about savings these are usually short term and are for a specific goal such as a deposit on a car or emergency savings.

Cash-based investments – such as money market or fixed deposit at the bank – are the best option for savings as they are low risk and there is no chance of losing money over the short term.
When we talk about investing, we mean longer-term goals of more than five years. Investing is about allowing money to grow and benefit from the power of compounding growth.

The key with long-term investing is that inflation becomes theyour main risk as money needs to grow faster than the rate at which living expenses are increasing. The only way to combat inflation is to invest in growth assets such as shares and property. Unit trusts or exchange traded funds are good options.

Unit trusts are generally managed by some of the best investment professionals in the country. It is therefore important to choose a fund with a good long-term track record as these managers have proved themselves through all market cycles.

Unit trusts provide great flexibility with regard to how money can be invested, meaning that Kwadzanai will have flexibility in terms of having access to money. And he can make lump sum withdrawals at any time or regular monthly withdrawals if needs be.

Another option is exchange-traded funds (ETFs). These are funds which track a specific index of shares on the JSE and which provide the average return of the stock market. They have lower fees than unit trusts because they are not actively managed by a fund manager. Only about 20% of fund managers actually outperform the average of the stock market yet charge higher fees, which is the reason ETFs are gaining popularity.

Satrix has a range of ETFs but the downside, however, is that they are not diversified across a range of asset classes – such as bonds and property – and Kwadzanai would only have exposure to the stock market. This would increase the risk of the investment. A unit trust fund manager with a flexible or balanced mandate can invest across the asset classes and lower the volatility of the investment.

For both unit trusts and ETFs, there is tax on interest and capital gains tax which will occur each time he chooses to withdraw money from the fund, although there is no capital gains tax on the first R17?500 of profit.

An endowment policy may not be suitable due to the restrictive nature of the policy, but also due to the fact that tax is deducted at a rate of 30% within the policy, which is higher than Kwadzanai’s current marginal tax rate.

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