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Dear Reader,

Well done in establishing your financial goals and more importantly your time horizons.  Prioritising your goals and working with your disposable income, will guide you on how to invest. The terms broken down below will point you in the right direction.

Unit Trusts. This is one of the easiest and most convenient means to take part in the investment world. Generally you can invest with a minimum of R500 per month. They offer flexibility when changing your debit order or accessing your funds, with no penalties or restrictions. Crucially, they are fully transparent.

Asset Classes. The most important part about choosing a unit trust is establishing the underlying make-up of the unit trust. Asset classes can be grouped broadly into four; cash, bonds, property and equity. Cash is mainly fixed deposits, bonds are money loaned and have different maturity dates (the longer the maturity, the more risk), property is listed property companies on the JSE and equity are shares of JSE listed companies.

Risk. The risk associated with each asset class is vastly different and is generally in the order mentioned above, from least to most risk. Risk, simply put, is the change in “returns” or price of your investment. The more it goes up and down, the more risky. Imagine a graph in your mind, cash would have a smooth slightly upward titling line whereas equity will look like a whole lot of hills and valleys.

Risk profile. The shorter your investment horizon, the more conservative your risk profile is, meaning, you require greater exposure to cash and bonds and less to property and equity. For an aggressive profile and long investment horizon, the opposite would be appropriate. Asset allocation (the mix of the 4 you hold) is the most important aspect to investing. For example, if you would like to put a deposit on a house in 5 years time your risk profile would be moderate and you and would look at a unit trust with a mix of asset classes but with sufficient equity exposure. A balanced fund would give you the appropriate positioning as your equity exposure would be between 50-75%, bonds 0-20%, Cash 0-20%, property 0-25%.

Tax. Don’t forget about this evil. Your unit trust will give you returns in the form of interest, dividends and capital gains (all of which are taxable). If you sell a unit trust i.e. withdraw, this is a capital gain event.  There are however, tax emptions that apply.

Costs. The fund manager will charge a fee to manage the fund, either a flat fee or a performance-based fee. All the information you need to know will be on the fund fact sheet. Like anything in life, cheapest is not always the best.

A lot of information was covered in a tiny space so please feel free to contact me if you would like further explanation or information [email protected]

Beth Orchison CFP®
B.Comm (Stellenbosch) Financial Navigator

Disclaimer: The contents of this article are not to be constituted as advice.

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