On the Money with Pieter Willem Moolman: Choosing an Investment Vehicle
www.MyPE.co.za: As I
mentioned last time, the field of investment options - or vehicles - is
vast and may prove to be a bumpy ride for the uninformed.
All potential investors want the best return on their money, of course,
but each person comes with a set of circumstances that have to be
considered when giving advice.
An important choice
that has to be made by the investor is in what investment vehicle he
wishes to invest his funds.
Keep in mind that the vehicle does not necessarily regulate the returns
that will be achieved. Rather, it sets the rules for the liquidity of
funds, the term of the investment or tax implications for the investor.
One often hears the comment that retirement annuities or unit trusts
are not performing well. In reality, neither one of these
will essentially perform better than the other (leaving tax
implications aside for the moment).
A retirement annuity is a specific product with special rules relating
to the tax deductibility of contributions, the application of
investment proceeds at retirement and accessibility to funds during the
investment term.
Unit trusts, on the other hand, are more liquid and flexible and can
also be used as part of your retirement planning.
Certain investors may however perceive the tax implications relating to
unit trusts more negatively than others. For example, selling units may
have capital gains tax implications and all interest earned in the
underlying units are for the investor’s own account.
For tax sensitive investors, endowments may offer a suitable
alternative. The proceeds of endowments pay out tax-free to the
investor at the end of the term and during the course of the investment
all tax is payable by the investment company (on behalf of the
investor) at a specified rate, sometimes lower than the investor’s
marginal rate of tax.
Whereas in the case of unit trusts there is no fixed term, endowments
have a minimum investment term of five years, with limited access to
funds during this time.
A further option for investors is to invest directly in shares listed
on the securities exchange. This means that the investor has
only exposure to one asset class, shares or equities, but this does not
mean that a share portfolio is automatically a high-risk investment as
some people tend to think.
Again, the investor bears the tax responsibilities directly and has to
declare income earned or capital gains realised.
Some investors may feel that a mixed basket of investment asset classes
is more suited to their needs, which brings me back to my earlier
statement that most investment vehicles do not directly affect the
growth of the investment. Rather, the funds that you eventually choose
within this vehicle will do the work.
So, if you choose to be very conservative and stick to cash and money
market type funds, you will have a smooth rate of return, but, over
time, these returns may not keep pace with inflation.
On the other hand, a more balanced approach with exposure to other
investment asset classes such as property, bonds and equities (in
differing proportions) would appeal to investors who are not completely
risk averse and look for a return from diversified sources.
The important issue is of course that investors make an informed
decision at all times.
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Pieter Willem Moolman is the founder of PWM Financial Management in Port
Elizabeth in the Eastern Cape. Their mission is to provide financial
security and create wealth for their clients.
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