Rainy days, exotic holidays, fancy cars, fairy-tale weddings – for most of us, these things are not going to happen unless we make it happen. To do any of this, we need to have money saved to pay for it – debt quickly turns into a dream-stealer we need to avoid.
Playing around with the numbers can help you understand our funds a little better and can go a long way in helping you make your investment decisions. You know what they say: “The best way to learn is to do”.
You’ve made the commitment to save and decided on a fund – the hard part is over! Now for the paperwork. Don’t despair – it’s easier than getting a driver’s licence, and we are here to walk you through the process, from the beginning until the very end.
A unit trust is a more formal, regulated version of what many South Africans understand as the stokvel concept; a savings or investment society that people contribute an agreed amount to, and in which they accumulate growth. Getting a group of people together to pool funds enables a more efficient, cost-effective investment vehicle, and enables the sharing of costs, i.e. administration costs, regulatory fees, investment management fees.
What happens is that all the investors pool their money by investing in the unit trust fund, and this fund is divided into equal units. Each unit has exactly the same value. When you invest you are allocated a number of units depending on two things: 1) how much money you invest e.g. R100, and 2) the price of the units on the day you buy them, e.g. 250 cents per unit. By way of example, the number of units you buy with be R100 divided by 250 cents = 40 units.
The price of the units changes daily, and this is because the prices of the underlying investments change daily.
A unit trust usually invests in a combination of equities, bonds, listed property and cash. How much is invested where depends on two main things: the mandate of the fund and its risk profile.
The mandate is the legal document (a trust deed) which prescribes where and what the fund may invest in; the risk profile helps the investor to understand how bumpy (or not) the ride will be.
There are a number of benefits to investing in a unit trust. These include:
Unit trusts are managed by investment specialists/portfolio managers supported by an administration team that the average- investor-in-the-street would not normally have access to.
Costs are relatively low compared to investing directly in shares, bonds or other assets because of the pooling of assets and sharing of costs.
Safeguards and transparency
Unit trust management companies are strictly regulated with prices being published daily, making them transparent and safe for individuals. Funds are held in trust by trustees who also monitor the fund’s transactions and ensures that it invests where and how it’s supposed to according to the mandate.
Diversification means that you spread your money across a range of investments so that you are not exposed to only one asset. The reason for doing this is to help reduce the volatility of your portfolio over time. This is more commonly known as ‘not putting all your eggs in one basket.’
Quick and easy withdrawals at no cost
Investors will always have easy and quick access to their unit trust funds – withdrawals can be expected to take about 24/48 hours to be processed. There are no additional costs or penalties incurred, and no lock-in or waiting periods. This can usually be done on-line for optimal convenience.
If you decide to make a regular contribution to a savings fund, e.g. a monthly debit order, this is not cast in stone. This amount can be reduced, increased, or stopped at any time. You can also add a lump sum to your investment account and then just leave it to grow quietly by itself.
Only paying tax on capital gains once disinvested.
"Indexing" is sometimes called passive fund management. This is because instead of having a portfolio manager actively selecting stocks and market timing (that is, choosing when to buy and sell them), the portfolio manager builds a portfolio whose performance mirrors that of a particular index.
There are various indexes that can be followed; most commonly referred to in South Africa are the FTSE/JSE All Share Index (J203), which is the broad stock market, or the Top 40 (J200) version of that.
In the U.S, the most popular index funds track the Standard & Poor's 500 Index (S&P 500).
An index fund can provide broad market exposure at lower costs than active funds. Because of its very nature, it has lower operating expenses, and low portfolio turnover.
An index fund is a type of unit trust (Collective Investment Scheme) with a portfolio constructed to match or track the components of a financial market index, such as the JSE/All Share Index. Such a fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. These funds follow their benchmark index no matter what the state of the markets is.
They’re both pooled accounts, so that means many people pool their money together to gain access to the stock market at a lower cost and are both regulated by the FSCA. However, you’d buy an ETFs the same way that you’d buy a share, i.e. you’d need to go through a stockbroker.
A major difference between an ETF and a unit trusts is that with a unit trust you buy units from the management company, which creates units when you invest and cancels them when you sell/repurchase them. This means that you do not have to wait for a buyer; there is no delay in accessing your funds. With an ETF, you buy a share which then needs to be traded (as with any other share), which means there must be a willing seller when you want to buy and a willing buyer when you want to sell.
There are four broad classes of assets available to you when building an investment portfolio: shares or equities; property; bonds; and cash (money markets and equivalent).
Asset allocation is the process of deciding how much money to invest in each asset class with the purpose of balancing risk in your portfolio.
To make the most of asset allocation decisions, you first need an understanding of each asset class and the importance of strategic (long-term) asset allocation.
It is important to have different asset classes in your investment portfolio to take advantage of the different strengths and characteristics of each class at a given point in time.
Combining and moving into different asset classes in different proportions will help you achieve your investment objectives while taking less risk to do so.
There is more than enough empirical evidence that proves that more value is added to an investor’s portfolio by asset allocation than stock selection. For this reason, when we choose to invest in an asset class, we obtain passive exposure to an asset class (indexation).
To try and encourage saving, the government has introduced tax-exempt investment and savings products. This means you won’t be taxed a single cent on any of the returns on these investments. There is no Capital Gains Tax (CGT) or tax on the growth, interest and dividends earned.
Simply put, this means:
All growth of the underlying investment is fully exempt from any tax;
Investors can withdraw their money at any time;
Contributions are flexible; they can be made as a lump sum or via debit order;
Parents can open separate accounts for their children.
The amount that can be invested into these products is unfortunately limited. Currently, each individual can have an investment of up to R36,000* per tax year (the equivalent of R3 000* a month), to a lifetime maximum of R500,000*. This amount is per individual, i.e. a parent can have a tax-free investment for each of their children in this amount. They can also invest for their parents or their domestic workers.
* Limits are subject to change as determined by regulation from time to time.
Any amount invested into your tax-free savings account that is over and above the annual or lifetime limit will be penalised at 40% in that tax year.
Any amount that you withdraw from your account will count towards your annual and lifetime limit. You cannot ‘replace’ an investment once you make a withdrawal.
Tax-free benefits only apply to new savings or investment products.
Whether you are looking to invest for the first time, or you want to add to an existing investment, this is where you’ll find any form you’ll need.