Deciding to invest is the easy part, but choosing the right investment to grow your money is a trickier task. For the average investor, there are so many questions to answer, such as: Which investments do I choose and where do I buy them? How long should I invest for and what are the risks involved?
To make it easier on you, City Press provides a quick, step-by-step guide on the basics of investing for growth, based on your appetite for risk.
SHORT TERM (UP TO 18 MONTHS)
If you are investing for a short period or need access to your money, then conventional savings accounts offered by banks could be right for you. “These include basic savings accounts, money market accounts and fixed-deposit accounts,” says Thandi Ngwane of Allan Gray.
Traditional savings accounts offered by banks are generally less risky, as they’re not exposed to the volatility of the stock market. Your money earns interest, but you have to choose your account carefully because not all accounts offer you rates that will beat inflation. The official inflation figure is currently around 6.8%, but many households experience even higher inflation rates.
Unless you choose a fixed-deposit account, you can access your money straight away, which is handy in emergencies. However, if you feel it would be too tempting to have money so readily available, consider asking your bank for a savings product that are only accessible at the end of the investment period.
MEDIUM TERM (TWO TO FIVE YEARS)
If you want to save for the medium term and are prepared to part with your money for at least two years, you could consider RSA Retail Savings Bonds. There are two different types to choose from: the RSA Fixed-Rate Retail Savings Bond and the RSA Inflation-Linked Retail Savings Bond.
It’s offered by National Treasury and there are no fees such as admin or monthly account costs that can eat away at your savings. What’s more, your capital is guaranteed and the interest applied is set above inflation, which means your money will not erode while you invest in the bonds.
“They have been marketed well and are positioned as less risky than investing in shares. It’s effectively lending the government money in return for an income stream,” explains Ngwane.
Investing in retail bonds is relatively easy – you can buy them at any SA Post Office branch, most Pick n Pay outlets also offer them, or get them online at rsaretailbonds.gov.za.
LONG TERM (MORE THAN FIVE YEARS)
When it comes to investing in the long term, you have to expose your money to more risk, especially if you want it to grow. This means investing your money in vehicles such as unit trusts and exchange-traded funds (ETFs). These offer investors an opportunity to invest in the stock market without having to select individual shares.
Unit trusts enable you to invest in a “pool”, where the money is used to invest in financial instruments, such as equities and bonds. You, along with other investors, share in the fund’s gains, losses, income and expenses, so it’s vital to choose the one that’s best for your needs.
ETFs are listed investment products that track the performance of a group or “basket” of shares, bonds or commodities.
These “baskets” are known as indices.
“ETFs are becoming popular because they are generally cheaper than investing in unit trusts. But there is a drawback in that it tracks an index.
“So there are no decisions behind it when there’s volatility in the markets, whereas with unit trusts there are active managers making decisions,” Elize Botha, managing director of Old Mutual Unit Trusts, points out.
She adds that both unit trusts and ETFs are ideal vehicles if you’re after growth.
“They can absolutely exceed inflation. There are different classes to invest in. If you need growth, make sure you invest in ones with exposure to equities and real estate or into balanced funds that invest in equities, bonds and property.”
WHERE CAN I FIND OUT MORE?
Choosing the right unit trust, ETF or savings account is not easy as there are many products on offer. However, there are a variety of ways to narrow down the field. “You can get a financial adviser to help you or there are online tools that ask you questions and then recommend products. However, the tools will only be as good as the quality of the information you put into them,” says Botha.
Further research can be done by delving into fund fact sheets, which are generally available online. You can also consider ratings awarded by rating agencies, such as Morningstar, and awards such as the Raging Bull Awards. However, these aren’t guarantees of performance for the future.
“Ratings and rewards are focused on the short term, whereas fund fact sheets will offer you better guidelines on performance,” says Ngwane.