Choosing an investment vehicle

Choosing an investment vehicle
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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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