Electing a suitable investment product
By the time you read this column, the South African president would have been inaugurated. This inauguration is preceded by stringent protocols and procedures.
The first order of business would have been the swearing in of MPs. The National Assembly is elected to represent the people and to ensure government by the people under the constitution. It does this by choosing the president.
This could be the right time for you to elect or review your current investments or savings products in conjunction with your professional financial planner. Similar to electing a president, you need to have in place certain selection criteria.
Investment products are fundamental to wealth generation. There is a plethora of investment products and options making it a challenge for investors to make an optimal decision. For example, there are more than 900 collective investment schemes (unit trusts) in SA.
The purpose of this article is to outline some tips on the selection criteria that can be adopted to ease the challenge of choosing the appropriate product at the right time.
Let us start by expanding on the difference between savings and investments. These terminologies are used interchangeably. There are however subtle differences.
Savings enable you to plan for your future and that of your family. You may wish to own a home by saving for a deposit to buy the home. You may also want to save enough money to pay for your children to study at tertiary level.
Investments on the other hand have some of the same characteristics as savings.
Generally, investments make it possible for you to use your money to make more money. Instead of spending your extra money, you can invest this money, either regularly or as and when you have money to invest.
Investing money for when you are older and no longer able to work allows you to save money for your retirement.
The important question to ask is whether the investor is trying to meet short-, medium- or long-term goals?
What follows are some practical tips that could assist investors in determining their selection criteria:
l Investment term: The period of investment will determine among other things the level of risk of capital loss an investor is willing to assume.
l Risk tolerance: Risk can be defined in many ways. For the purpose of this column, the investor needs to determine how tolerant he or she is to a sudden drop in their accumulated investment value.
l Costs: The total expense ratio should also be analysed as this will have an impact on the investment growth.
l Liquidity: The structure of the investment product should be determined in relation to the flexibility of early withdrawal should the need arise. Some products have lock-in periods.
l Tax: Every investment has tax implications. You will either be taxed directly at your marginal rate (with possible exemption) or indirectly within a particular investment product. This is important as it will impact the pace of investment accumulation.
l Inflation: This erodes the capital value of an investment. The desired investment product should be assessed in terms of targeted inflation objectives.
A one-size-fits-all mentality does not work when it comes to savings and investments options. out there. A thorough needs and goals analysis is necessary. A certified financial planner can be approached to assist in researching options; and providing the necessary guidance to select the appropriate investment and savings products.
- Sekese is a certified financial planner and member of the Financial Planning Institute, visit www.fpi.co.za