The Good Investments
At Growmatter, we do not operate in the realm of the Bad and the Risky investments but we believe that we all need to be aware of all options out there so we can make better decisions. In our future articles, we will be unpacking some of the bad and the risky investment decisions you could make.
Good investments are not necessarily investments with no risk but they are equipped with many ways in which to measure the risk and returns. There are several key differences between each of these good investments making some better than others. Even though they are not all equal every one of these investments has something in common.
"Change is Inevitable but growth is a choice" Bob Proctor
The primary things “good” investments all have in common is that they are legal, structured and regulated. If something goes wrong you can hold institutions and people accountable. Assuming something happens that shouldn’t, you have legislation and regulators that protect you, like the consumer protection act and the FSCA regulators.
Even though these investments are highly regulated it does not mean these investments are guaranteed to succeed. You still take risks to get returns but these risks are often measurable and you can choose the level of risks vs return. You still need a sound investment strategy to succeed.
In this regulated space it can be compared to the new car market where there are warranties and service plans, you know exactly what you are getting and there is a high level of transparency. There is no guarantee you won’t get a flat tyre but if there is a mechanical fault you can take it back to the dealer.
We will now go through a few good investment opportunities that are worth considering. This comparison is an overview of good investments and is not comprehensive enough to base investment decisions on. Should you wish to start growing your money we can help you find an investment that matches your savings goals.
Types of Investments
Unit Trusts
Investments offered to the public through a regulated investment platform. This investment aims to maximise returns through the economies of scale.
Unit Trusts are collective investments. Portfolio managers pool investor funds and then manage the investment on behalf of their investors. There are hundreds of these different unit trust funds each with different goals and strategies on how to achieve a return. The amount of each asset class they hold depends on the outline of what the unit trust wants to achieve. Think of it as a grocery basket. The grocery basket is filled with 80% carbohydrates and starch, 10% dairy, 7% vegetables and 3% sugar. Now imagine a thousand of these grocery baskets all with different weightings of food groups. You as the investor can go and buy whichever grocery basket you would like according to your diet goals. We will delve deeper into unit trusts in a later article.
Share Portfolios
This is a portfolio of shares that aims to achieve your desired goal. Diversification allows you to reduce your risk and increase your returns.
Share portfolios are a group of shares that can be picked by the investor themselves or through a stockbroker or discretionary fund manager whose job is to research and buy/sell shares according to their performance.
These portfolios are can be rather risky investments as they are high equity investments, they are also more expensive than unit trusts. the main difference between the two is that in a share portfolio you have more control over the shares you own but it comes at a premium.
Emergency Funding
Investing in a low risk, interest-bearing account where your money keeps up with inflation and you can withdraw your funds within 5 days.
Emergency funds are substitutions for a bank savings account but offer a better return. Emergency accounts generally consist of conservative unit trusts which are formed from cash and bonds.
These are stable investments which offer a small return for very little risk. The returns earned protect your money against inflation and gives it some form of growth. Instead of storing your money in a savings account at your bank, an emergency fund can be considered as a better alternative.
“Risk comes from what you don’t understand”. Warren Buffet
Retirement Annuity
A long term investment that among other benefits has enormous tax benefits .
A Retirement Annuity is a great investment option when investing for the long term. The RAs we use unit trusts to build your portfolio make them very cost-effective.
The SA government encourages the public to save for retirement by offering large tax deductions. Up to 27.5% of your annual taxable income can be Invested into an RA and be tax-deductible. Making this one of the best long term investments you could make. There are several other noteworthy benefits to retirement investment such as being exempt from your estate, protection from creditors and providing a long term income to you and your family after age 55.
Pension, Provident and Preservation Funds
Retirement type funds offered by either a company (Pension or Provident) or by the government (GEPF). Usually there is a compulsory contribution and taken from your gross salary.
Built on the same set of principals as retirement annuities. Usually, the employer contributes an amount to the fund and the employee also contributes sometimes funds have rules around contributions and in general, employees have the option to make additional contributions.
Each pension or provident fund is entitled to make its own set of rules but ultimately the fund still needs to align to government legislation which is similar to a retirement annuity. When an employee leaves the company or government, they can transfer their portion of capital into a preservation fund which continues to grow till retirement. There are some noteworthy differences between provident and pensions funds and it is crucial to consult an investment specialist when exiting employment as your decision on what to do can have significant consequences to your tax and long term growth.
Tax Free Accounts
Long term investment option that offers a chance for investors to invest a certain amount without paying any tax on it.
Tax free accounts are a great way to invest money as you pay no tax when withdrawing it in the future.
Tax free accounts are regulated and allow individuals to have one tax free account in their lifetime. An annual contribution of R36 000 can be invested into a tax-free account and a total of R500 000 in your lifetime. This offers an amazing opportunity for investors to reap the benefits of long term investing without having to pay tax like you would with the other investment options.
Endowments
A medium term investment that offers estate benefits and tax-efficient structures.
Endowments are a disciplined way of saving money. An investor would take out an endowment for a fixed period of 5 or 10 years by investing a lump sum in the beginning or making regular contributions. The funds are locked into the endowment until the chosen period is over. Investors can invest in a range of different unit trusts according to the risk and growth they would like to take. The benefits of opening up this investment plan are that it offers a tax benefit and your funds are protected against debtors.
Out of all the investment options, one could look into, these are the options that would be recommended by your banker, financial advisor, accountant and even the most successful investors themselves. Get in touch with us or your financial advisor in order to find out exactly how to start one of these fruitful investment opportunities.
So stay locked in for the next two articles in the series where we will be giving you some insight into the ‘bad’ and ‘risky’ investment options that you should try and avoid.
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The information provided is not intended to address the specific circumstances of an individual and is for information purposes. Should you require financial advice please contact us info@growmatter.co.za
