Get to know your investment terms

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April is Financial Literacy month, so what better time than to shed light on financial education – specifically around the often-misunderstood world of investing.

According to a study released by the Financial Services Board, South Africa currently has a financial literacy rate of 51%. Although this places us on a par with a number of developed countries and higher than many contemporary developing nations, it indicates that there is plenty of opportunity for us to become more financially literate.

Lance Solms, Managing Director at Itransact, shares some investment terms related to index funds that will help fill the piggy bank of financial literacy and assist more of us start or take the next step on our investment journey:

Index Funds

Index funds are passively managed unit trusts that track indices by holding the physical assets of the indices they track. These are traded like shares on a stock exchange. Index funds may track one or more domestic or international equity, bond, property, commodity and money market indices. You can manage your index fund through a registered financial advisor or robo-advisor. 

Index Fund Portfolios

Portfolios are discretionary managed portfolio products that track the market by investing in a basket of low cost index funds. These baskets represent domestic and international money market, fixed income, property and equity indices according to an asset allocation model that is risk adjusted.

Tax Free Savings Account

Tax-free savings account is an effective way to save for your goals, because any interest, dividends or capital gains will be free of tax. A TFSA may contain one or more selected passively managed index funds that track indices by holding the physical assets of the indices they track. These are traded like shares on a stock exchange. 

Retirement Annuity

Retirement annuities are low cost, penalty free investment products that you can get through your financial advisor which track the market according to pension fund regulations. This is achieved by investing in a basket of low cost index funds which represent domestic and international money market, fixed income, property and equity indices.

Preservation Fund

Preservation funds are low cost, penalty free investment products which preserve pension fund assets when one changes jobs. They track the market according to pension fund regulations. This is achieved by investing in a basket of low cost index funds which represent domestic and international money market, fixed income, property and equity indices.

Living Annuity

Living annuities let you choose and switch between low cost, penalty free, risk adjusted index portfolios. These track the market by investing in a basket of low cost index funds which represent domestic and international money market, fixed income, property and equity indices according to an asset allocation model that is risk adjusted.  Beneficiaries nominated by you receive the residual value, free of any estate duty, on the death of the annuitant.

You can get these products through a registered financial advisor or through the digital robo-advisor platforms.

“Investing terms – like anything else related to financial education – requires extensive research and time to study in order for you to get fully immersed and understand them. Speaking to your financial advisor should be the first step in getting to grips with your financial terms and beginning to build a strong foundation that will allow you to make savvy investments that truly make your money to work for you,” concludes Solms.

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