Tuesday, September 13, 2016
Investment vehicles and Investment Funds
Many seem to get confused around investment vehicles and investment funds /
strategies and may fall into the trap of thinking one investment vehicle
(eg: Unit Trust) performs better than another (eg: Retirement Annuity). The
reality is that performance is primarily driven by the type of fund(s) you
are exposed to and what their asset allocation looks like.
Let's draw an analogy…..
Land Rover meets Lamborghini in a sprint race – who's going to win? Well, it
depends........assuming a flat tarred surface and the Lamborghini will be
the obvious choice. If, however, the track was a rocky 28° incline then the
Land Rover would become the clear winner.
And so it is with the selection of investment vehicles with the track
'condition' being aptly represented by tax – select the incorrect vehicle
for your circumstances and needs and stand the risk of placing unnecessary
'drag' on your investment performance. The way to increase the performance
of these investment vehicles to provide better returns would be likened to
choosing a 'bigger engine' for the vehicle and boosting long term returns
through greater exposure to equities and property. Just looking to cruise?
You would then opt for more bonds and cash in your investment vehicle.
The main differences between investment vehicles (from a legislative point
of view) are that of tax and liquidity and when deciding on which vehicle(s)
to use to house your wealth, these should be the topics that are dealt with
With the wide array of investment 'products' available in the market, the
surprising truth is that they all fit into one of the following categories:
Collective Investment Schemes (eg: unit trust)
So although there may be one or two bells and/or whistles added to some of
these products by the life company or investment house, the undeniable truth
is that they all fall under the same legislative constraints and obligations
as each other – understand how they are governed and be empowered with
perspective of which is best for you.
The tax aspect of investment vehicles are dealt with in two areas namely;
income tax and Capital Gains Tax (CGT). One has to consider what income tax
concessions (if any) are given on the premium or contribution made to the
investment as well as explore how you or the fund will be taxed whilst in
the fund and finally understand what tax will be paid (if any) on exiting
Liquidity of an investment is purely the extent to which the funds invested
in a given investment vehicle can be liquidated (cashed out).
For the most part, there is a trade-off between potential immediate tax
benefits and liquidity constraints. It therefore become important to have
one's investment portfolio intelligently structured in order to maximise
both elements and ensure that one is either not falling into a tax trap or
forcing their wealth to become illiquid.
So, in short, while correctly structuring your portfolio within the right
investment vehicles can optimise your tax, the key driver of returns are
derived from the investment funds and asset classes you hold.
Philip Barnard Tel: 021 975 0933 Cell: 083 270 4721
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