Three easy ways to invest a little
Usually a little money means limited options. But when it comes to investing, there are many safe and sound ways to grow small amounts of money over time.
Financial coach Eunice Sibiya says that for many people, the fear of losing money and the lack of financial knowledge are barriers to investing. Over-indebtedness and poor budgeting - or no budgeting at all - are other reasons people don't invest, she says.
Even the word investing is often confused with saving. But there is a difference. Saving is putting money aside for future use, whereas investing is what you do with money to earn a return.
We should save for events such as birthdays and children's school uniforms and dances, as these things come around like clockwork. And we should invest for longer-term needs, such as an income in retirement, unless you think you can manage on a social grant of R1 700 a month.
Frank Magwegwe, a financial adviser and certified financial planner, says before you dive into investing, make sure you have emergency savings in place and have paid off expensive short-term debt.
Magwegwe explains why investing is best done over three years or longer: "Investment returns depend on financial markets, which can be risky in the short term, but provide good returns over the long term. Always remember, financial markets move up and down, and this affects the value of your investments in unit trusts, exchange-traded funds and shares.
Unit trust funds
A unit trust pools money from many investors to invest in assets such as listed shares, bonds and listed property, Magwegwe says.
"This big pot of money is then managed by professional investment managers. There are numerous unit trust funds from which to choose, ranging from conservative funds that deliver more predictable returns to aggressive funds that aim to outperform inflation over the longer term but with higher short-term risk."
Unit trusts are offered by companies such as Coronation, Allan Gray, Old Mutual and Sanlam.
Thandi Ngwane, the head of strategic markets at Allan Gray, says unit trusts are ideal investments because they provide a safe, easy and flexible way to invest.
What makes unit trusts safe? They're highly regulated and it's easy for investors to check that the institutions offering them are licensed to do so. They're also transparent, making it easy for you to check on the past performance of the fund (not that this is always a predictor of future performance).
They're easy in that the decisions to buy and sell the shares or bonds - and decisions on the amount to invest in local financial markets relative to offshore markets - are made by an asset manager in charge of the funds.
“Flexibility is also a wonderful feature of a unit trust investment in that you can stop your debit order when you fall on hard times, without incurring penalties, and then restart when you are able to. This is unlike endowment policies. With a unit trust, there’s no lapsing of a policy. And you can contribute extra money when you have it – or reduce your contribution when you need to,” Ngwane says.
First-time investors in unit trusts often battle to choose a fund from the 1320-odd on the market.
"But for people looking to invest for five years, a balanced fund is a good place to start, because it's adequately diversified," she says. Balanced funds, also known as multi-asset funds, ... invest across shares, bonds, money markets and listed property.
Unit trusts are often described as "accessible". This is because you don't need huge amounts of money to invest. There are many on the market that accept minimum investments of less than R500 a month.
You can invest in the PSG Balanced Fund, for example, for only R250 a month. The fund has delivered an average return of 11.33% a year over the past 10 years and Morningstar ranked it 5th out of 80 balanced funds with a 10-year history.
Exchange-traded funds (ETFs)
ETFs are listed investment products that track the performance of a group or "basket" of shares, bonds or commodities, explains Magwewe.
"These 'baskets' are known as indices. An example of an index is the FTSE/JSE Top 40 Index which represents the 40 largest companies by market share (capitalisation). Simply put, you make money when the index does well.
On the other hand, if the index performs poorly, this will have a negative impact on your investment." However, while indices may reflect poor market performance over shorter periods, tracking one over a longer term is likely to make you money.
ETFs are diversified investments, which makes them less risky than an investment in a single share. They are also low-cost because they are not actively managed by teams of investment professionals.
Some ETF providers are Satrix, Absa Capital, Ashburton, Coreshares and Sygnia. Some of these index tracking options have relatively high minimum investment amounts. But there are many that accept amounts of less than R300 and some that have no minimums.
“There is no minimum investment amount to access the Satrix 40 ETF on SatrixNOW.co.za platform. This applies to any of our products on this platform,” says Jenny Albrecht, the chief operations officer of investments at Satrix.
The Satrix 40 has delivered a return of 9.74% a year over the past 10 years.
There are more than 90 ETFs listed on the JSE, says Nerina Visser, a director at ETFSA. You can invest in an ETF for as little as R150 a month if you go through ETFSA’s investment platform.
Shares - also known as stocks and equities - are investments in a company that is listed on a stock market. When big companies need to raise money to expand or to pay off debt, instead of borrowing money from a bank, they sell shares in their businesses to the public.
When you become a shareholder of a company, you become entitled to a share in the company's profits. This is called a dividend. And if the company loses money, the value of your share falls but you only lose money when you sell your share for less than what you paid for it.
. Buying the shares of a successful company can be expensive – a single share in Naspers, for example, would cost you more than R3200, and it is risky. It is better to invest in a number of shares so if one loses value sharply, the others will hopefully do better.
An accessible way to invest in shares is via Easy Equities, which allows you to invest any sum of money by buying a fraction of the shares you want to invest in.
Investing small sums of money on a regular basis, via Easy Equities, enables you to easily build a diversified basket (or portfolio) of shares of known brands, or choose pre-selected bundles of listed shares.
Unlisted shares are dangerous because there is no transparent pricing mechanism for trading. For example, you may be offered shares in an unlisted company for R5000 a share, but the same shares could being sold for R500 to other investors elsewhere. Listed companies are subject to a strict regulations and if they don’t comply they can be de-listed.