What to do with my inheritance?

A Fin24 user wants to know what to do with his inheritance. He writes:
I am a young, single gentleman of 26 years old, studying towards a CA qualification.

I inherited a lump sum of R500 000 from my uncle.

Can you please tell me in what clever ways I can invest this money in South Africa, so that I keep having greater fruits from the returns? I am not a South African citizen.

Derick Ferreira, head of product management at Old Mutual, responds:

You first need to identify an objective or purpose for the investment you are contemplating.

This would then determine the type of investment you need.

Once your objective is identified, you should bear two key differences in mind: the actual investment product you are considering, and the underlying investment funds.

Factors to consider that will influence and direct your decision as to the more appropriate product include the liquidity levels you need in terms of access to the capital, and within what timeframe.

Medium- to longer-term investment products that offer higher liquidity levels would be unit trusts or linked investment products as opposed to a single premium life wrapper, where the minimum term is five years and withdrawals within the first five years are limited to one loan and one disinvestment.

Retirement annuities offer no liquidity and proceeds may only be accessed after you reach 55.

Another factor would be the level of guarantees or security required.

The income tax position and effective income tax rates are another factor, as the growth in the various investment products are taxed differently.

Typically a unit trust fund is subject to capital gains tax upon disposal, while growth on a life endowment would be taxed in terms of the four funds taxation at a current rate of 30%.

Considering that you are not a South African citizen, it may be wise to determine whether you will be subject to any double taxation agreement between South Africa and your country of residency.

It is also important to consider the impact upon death during the term where nominations of beneficiaries for proceeds might be a consideration, especially in terms of potential savings on executor’s fees.

Concerning underlying investment funds, your risk profile and need for real growth would be the key considerations.

Investing in underlying interest-bearing assets should offer higher levels of security, but potential lower real returns.

Investing in equities tends to offer higher returns over the long term, although volatility levels will be higher.

Should you decide to commit to market exposure with more aggressive growth, it is always a good idea to consider investing a portion of your capital in a shorter-term investment.

This will then serve as an emergency fund so that you won't have to disinvest funds from the long-term investment.

Most importantly, consider the need to invest in asset classes with the potential to improve the purchase power of your capital.

It is also important to remain disciplined and not to terminate or withdraw from funds so that you can enjoy the benefit of compounding growth.

Your citizen status will affect your tax liability on investments, so it is really of vital importance for you to consult a financial adviser who can assess your requirements and needs and match them with the best, most tax-efficient investments for you.

Sound principles for sensible investing

I also think it is important to keep the following investment principles in mind:

 - Understand your time horizon and risk profile; the longer you have to invest, the more risk you can afford to take.

If you have 18 years or so to invest, you could invest in high-risk markets, which should ensure the best return on investment without focusing on the ups and downs, but rather on the end destination.

If, however, you only have five years to invest, you should consider a more cautious investment strategy, because you won’t have the time to make up for market losses.

 - Remember that cash is unlikely to outperform inflation over the longer term, although it may be seen as a safe haven during uncertain times.

 - It is time that counts in the market – not timing the market.

The longer investors are in the market, the better the likelihood of making up for losses. Also, the sooner you start saving, the more time you have to earn compound interest.

The principle of compound interest basically means that interest is earned on the interest already earned.

The effect is a dramatic snowballing of the money invested and the interest earned.

 - Keep investing at regular intervals over the long term.

Most people want to invest when markets are doing well and tend to disinvest when the markets fall.

It makes better sense to keep on investing through market lows when share prices are undervalued and a lot cheaper, so that you gain more wealth during the highs.

 - Diversify, so that if one market does not perform well you will still have other investments doing their best for you, thus managing your risk in the process.

Don’t focus on returns from individual investments. See your investment portfolio as a whole.

 - Balance your portfolio – do not invest only in property or only in cash. Seek to maintain a sensible balance between different types of investments.

There will always be times when one asset class outperforms another.

Remember that cash and bonds provide stability, while shares and property provide growth.

 - Choose a professional portfolio manager, whose job it is to investigate opportunities and make sound investments.

Remember that each person is unique – a good investment for somebody else is not necessarily a good investment choice for you.

 - Invest with a company that has a proven track record and that is well known within the industry.

Do not invest with a company that offers astronomical returns that are simply not viable in current market conditions.

 - A sound financial plan helps to achieve success, regardless of what the market is doing.

An accredited financial adviser can assist you in compiling a holistic financial plan that meets your requirements and takes your current circumstances into consideration.

In this way you will stand a good chance of making adequate provision for the future, so that you will be able to retire in comfort.

- Fin24

Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.

Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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