Q: I want to invest the proceeds of the sale of my house (approximately R600 000). I have no debt and will require university fees for my daughter in two-and-a-half years. I want access to approximately R200 000 on short notice as a deposit, if I decide to buy a house. Please advise where I can invest?
Investment decisions, portfolio allocation and volatility are amongst other crucial factors that are imperative discussions to have with a financial advisor, as due diligence in assessing the investor’s appetite for risk versus returns needs to be established.
Thus, this generic investment advice serves only as guidelines for educational purposes.
The objectives have been established from the client which are;
- For university fees in two years and six months’ time,
- Accessibility of R200 000 on short notice for a house, and
- There are no debts to be funded from this amount.
Because of the time needed to invest for, and the accessibility of, the funds, liquidity and flexibility of the investment vehicle needs to be key when choosing which [option] will best meet these objectives.
- What needs to be determined through calculations is how much will mostly likely be needed for university and then invest that in a cash investment facility of sort over the two years, so that the funds are readily available.
- The R200 000 also needs to be invested in cash because it’s needed at short notice.
- The rest, depending on the risk profile, can be invested in a balanced fund or an equity fund for long-term growth.
Money market/unit trust
There are two money market options that come to mind: one offered through a bank and the other via a unit trust through insurance houses. Both options are relatively low risk, but not no risk. Costs are typically low or non-existent, but there could be transaction fees. Be mindful of investment minimums as well as tiered interest rates depending on the cash balance. Money market vehicles are typically liquid with the bank account option available immediately and the unit trust option available with a few days’ notice.
Benefits of unit trusts
- Your money is in safe hands
The legal structure has been designed to prevent others from stealing your money. The Financial Services Board regulates unit trusts and the professionals who make the investment choices for you.
- Investment risk is usually lower than for other types of investments
A unit trust spreads your money across many investments. This means that if one investment doesn’t work out, you won’t lose all your savings. The flipside of this is if one investment does incredibly well, your entire holding won’t rise in value to that extent. So, there is less risk, but less return. Still, you have the comfort of knowing it is unlikely you will lose all your money suddenly.
- Unit trusts are easy to sell
If you need your money, you don’t need to give a long notice period – as you would if you place your cash in a bank account with a good interest rate. You can have your money within days. This is an advantage if you have an emergency.
- It is simple to track how your investments are performing
You can keep tabs on how your unit trust is doing in several ways. You can access your statement online, or find performance tables in the media. Your fund manager will also provide a regular update through fact sheets, which you can find on the website of your unit trust provider. The fact sheets provide quick summaries of how your investment is doing and what your money has been used to buy. So, you can see which companies you own if, for example, you have opted for an equity unit trust.
- You don’t need huge sums to invest in big assets
Unit trusts are designed for ordinary income earners. You can invest in lump sums or monthly debit orders. The latter usually start at around R500/month. Lump sums are often in the region of R50 000. Monthly investing makes it possible to build a large amount slowly on a limited income.
Ways to invest in unit trusts
The best way to invest in unit trusts is directly through a low-cost unit trust provider. Charges erode returns, so the less you pay to access an investment, the more cash will be left to grow for you.
A charge of 1% or more may not sound like much, but these tiny percentages add up to a huge amount in time. So, aim for a fund that charges less than this.
Disadvantages of unit trusts
A major challenge with unit trusts is that there are more than 1 000 unit trusts available in the South African market, so how do you begin narrowing your options? Most of these funds are chasing the same investments.
Many unit trust providers will try to impress you with sophisticated sounding investment strategies and styles. Don’t be fooled by the names. Some might be called things like ‘wealth builder’ but are actually poor performers compared with other unit trusts.
Probably the safest bet for an investor who is just starting out is an index-tracking unit trust. This is a fund that aims to match the market performance of a stock market index at a low cost.
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