Five-year plan for earnings
I have R300 000 I want to invest over a five-year period. I need good returns without taking too much risk and attracting too much tax.
Which is the best option between investing in a unit trust or a fixed-deposit account? I want to use the money to buy a small farm. A return over any timeframe must be seen in the light of the risk taken to achieve that return.
Over the short term, a unit trust with a great manager may underperform its peers, because they took a lower degree of risk than their peers.
Likewise, a mediocre manager may outperform a great manager, because they took a high degree of risk in a high-risk environment.
The notion of a high return with a low degree of risk over a five-year period is a fallacy.
Tax is an important aspect to consider when structuring an investment portfolio.
However, it must be seen in the context of what you would like to achieve. An equity return is treated more favourably than a return from a fixed deposit, but the risk associated with the two is not comparable.
Unit trusts with a minimum timeframe of five years are typically your multi-asset high equity funds.
For an informed decision, you need to know the risk associated with the options that are available. A balanced fund is generally seen to have a minimum timeframe of five years and may require a longer period. Poor market conditions can adversely affect a manager’s ability to generate returns consistent with their risk budget. This requires the investor to know the full extent of the risk that they are taking.
A fixed deposit gives you a steady return that is a known quantity upon investing. The interest is, however, fully taxable at your marginal rate subject to the annual exclusion.
You may want to consider the use of a multi-asset low-equity or medium-equity fund, which can give a better return than a fixed deposit over a five-year period, without the risk that can be associated with a multi-asset high-equity or balanced fund. The return can also be more tax effective.
A return over any timeframe must be seen in the light of the risk taken to achieve that return. Jesse Morgans Asset Protection International