Learn the basics about your Ki­wisaver fund

GOLDEN RULES

Auckland City Harbour News - - NEWS -

If all the news­pa­per col­umns ded­i­cated to Ki­wiSaver were laid end to end, they would stretch the length of the North Is­land.

I made that up, but you get what I mean – there have been a lot.

And that sheer, awe­some vol­ume of eru­dite Ki­wiSaver cov­er­age must be the rea­son 62 per cent of peo­ple in­ter­viewed by Massey Univer­sity ad­mit­ted they didn’t do any more than skim-read the ma­te­rial their Ki­wiSaver provider gave them while 8 per cent didn’t read it at all!

It’s more likely the ma­jor­ity of us lack the at­ten­tion span, higher de­gree in fi­nan­cial jar­gon and ac­cess to il­le­gal am­phet­a­mines, needed to get through the writ­ten ma­te­rial sent to us.

The re­port also said one in five peo­ple didn’t know what kind of Ki­wiSaver fund they were in, and I think it’s a fair bet a whole heap more don’t re­ally have a tremen­dous grasp of the kind of fund they are in, even if they do know the name of it.

So here’s my guide to get to grips with the most ba­sic of dif­fer­ences be­tween the three big­gest broad cat­e­gories of Ki­wiSaver fund: Con­ser­va­tive (in­clud­ing the de­fault funds), bal­anced and growth.

The first thing to know is that all three are run by fund man­agers tak­ing fees to pay them their six-fig­ure salaries. The more your fund is aimed at growth, the higher the fees.

All con­tain a mix­ture of three kinds of as­sets – cash, bonds and shares.

Cash is a word that stands for short-term de­posits mainly in banks.

Bonds are IOUs is­sued by com­pa­nies and bod­ies like gov­ern­ments which need to bor­row from in­vestors.

Those bor­row­ers pay in­ter­est to the bond­hold­ers and

Don’t be pas­sive. Make choices and know why you made them Read what you are sent Seek knowl­edge, ask ques­tions. prom­ise to give their money back at a cer­tain date.

Shares record the le­gal own­er­ship of a pro­por­tion of the com­pany that is­sued it, and a right to share in earn­ings handed out as div­i­dends.

All carry risk. The bank could go bust. Shares can lose value. Com­pa­nies can run out of money to pay the in­ter­est or also go bust.

For this rea­son, funds hold many shares and bonds from dif­fer­ent com­pa­nies and bor- row­ers and spread cash around banks to re­duce the risk of los­ing all the money.

Risk be­comes some­thing more akin to what you might call volatil­ity.

You can think of this as the bumpi­ness of the ride, the chance in any one year of a big loss, or gain in value.

Con­ser­va­tive funds hold lots of cash and higher-rated bonds. The chances of them los­ing value (ie, the banks go­ing bust and the bonds not get­ting paid back) is low. If you in­vest in a con­ser­va­tive fund you are in for the equiv­a­lent of the steady-asshe goes river­boat ride.

Bal­anced funds hold more bonds, more shares and less cash, so the chances of big­ger rises in value and big­ger falls in any year are higher. This is a chop­pier river ex­pe­ri­ence with dips and troughs.

Growth funds hold mostly shares. This is kayak­ing on a river with oc­ca­sional white­wa­ter. There will be ups and downs, though over the long haul, a growth fund should typ­i­cally beat the re­turn on con­ser­va­tive and bal­anced funds.

Fig­ures on the ex­cel­lent Sorted.org.nz web­site sug­gest there is a one in 13-year chance of con­ser­va­tive funds mak­ing a neg­a­tive re­turn, ris­ing to one in seven for bal­anced funds and one in five for growth funds.

Next week, my sub­ject will be how to use this knowl­edge to pick a Ki­wiSaver fund.

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