How to invest R100 000

There are various options when investing a lump sum, depending on what it is intended for and your appetite for risk. reports

You have a largish lump sum to invest. Let’s say it’s R100 000, which you came into through an inheritance, earning a generous year-end bonus, selling an asset such as a car or Ming vase, or winning the Lotto.

Of course, you could spend it – on material things, which depreciate in value, or on an unforgettable life experience, such as an overseas trip. But you’ve decided to put it away, either for a rainy day or for some future need, such as your child’s tertiary education or to boost your retirement savings.

Your main reason for investing the money is to let it work for you by earning a return. To score in real terms, the return must be above the inflation rate: about 6.6 percent (Consumer Price Index, or CPI, to November 2016).

So where to from here? There is a wide range of investment vehicles open to you. To determine an appropriate one, you need to answer the following questions:

• Do you want instant access to your money, or are you prepared to lock it into an investment for a fixed period, or have access to it only after a stipulated notice period? This is not the same as investing for the long or short term. You may decide to put away your R100 000 for 10 years, for example, but still want instant access to it if need be. (What are the benefits of not having instant access to your money? Bank interest rates are higher, and there are certain benefits to endowment-type investments, mentioned below. Also, the temptation to access it is removed – if you don’t trust yourself.)

• Do you want to invest your money for five years or more, or is it for a shorter-term goal?

• If the answer to the previous question is “five years or more”, are you prepared to take on more investment risk to earn potentially higher returns?

These are the main questions. The other issues are costs and tax, which will be dealt with as we look at the various mainstream options, which are categorised according to how you would have answered the three big questions.

This article assumes that, on a fixed-term investment, you will opt to be paid your interest on maturity. And if you are a senior citizen (aged 55 or 60, depending on the bank), you will receive an extra 0.5 percent a year or so on certain investments. You are limited to interest-bearing investments that provide the lowest returns – from well below the inflation rate to only just above it. The rates fluctuate in line with the prevailing interest rates. (Remember that you pay income tax on the total interest you earn a year from all your investments on anything above R23 800 if you’re below 65 years of age and above R34 500 if you are 65 or over.)

• Banks offer a variety of accounts, from everyday savings accounts, which don’t earn much more than four percent a year, to call accounts and money market accounts, which offer higher rates (about in line with inflation) but require higher initial investment amounts. There are no costs on these accounts, as long as you don’t use them for daily transactions.

• Unit trust money market funds are flexible in that you can withdraw your money at any time (unit trust funds typically pay out within 48 hours). They require minimum investment amounts of between R10 000 and R50 000, depending on the asset manager. Yields, which fluctuate daily, are between 6.75 percent and 8.12 percent (at the end of December 2016). There are investment charges on these funds: about 0.3 percent of your investment a year. If you want to put away your money for less than five years, and are prepared not to have immediate access to it, banks offer a range of notice deposits (whereby you can invest for any period, but your withdrawal is subject to a notice period of, say, 32 days) and shorter-term fixed deposits for as short as a month. The rates depend on both the term/notice period and the investment amount. You currently earn about 6.75 percent on a 32-day notice deposit of R100 000.

Fixed deposits lock in not only your money, but also the interest rate. So you get the rate over the investment term even if prevailing interest rates rise or fall. Current rates on an investment of R100 000 are between 5.7 and 6.95 percent on a one-month fixed deposit (on this type of shorter-term fixed deposit, you could simply renew it each time it expires) and between 7.7 and nine percent on a 24-month one, depending on the bank.

The banks also now offer more flexible fixed deposits whereby you have immediate access to a portion of your money – up to 40 or 50 percent. The more you can access, the lower the interest rate.

Another fixed- deposit- type option is RSA Retail Bonds offered by National Treasury. The shorter-term options of these are the two- and three-year fixed-rate bonds (8.5 and 8.75 percent respectively) and the three-year inflation-linked bond (CPI plus 1.75 percent). These bonds have no costs. For accessible, longer-term investments (five years or more), you would be well advised to go the unit trust route. These invariably come with higher investment risk than bank deposits, but if you are investing for the long term, the risk of losing money declines over time.

Low- risk unit trusts do not invest in higher-risk equity or listed-property investments, or these constitute only a small proportion of assets. The underlying assets are mainly money-market instruments and bonds.

You can choose from unit trust funds in the South African interest-bearing sub-category, or, for slightly higher risk and commensurately higher returns, in the South African multi-asset low equity and income sub-categories. (Multi-asset income funds are designed to provide a steady income at low risk, but they can also be used as a low-risk investment in which returns are reinvested.)

Multi-asset funds attract relatively high annual costs compared with other funds – about one to as much as three percent or more.

Such investments are a good choice for an emergency fund, if that is your purpose. For an accessible, long-term investment in which you are prepared to take on higher risk to increase your chances of high returns, your only real choice within the scope of this article is a collective investment in the form of a unit trust or an exchange traded fund (ETF) that is exclusively invested in, or that includes a high proportion of, growth assets, such as equities and listed-property investments. These include funds in the South African equity and real estate categories and, for slightly lower risk, the South African multi-asset flexible and multi-asset high- and mediumequity sub-categories.

An ETF is a fund listed on the stock exchange that tracks an index such as the FTSE/JSE Top 40 – in other words, it includes in its portfolio the same shares as the index, in the same proportions. Many passive unit trust funds (tracker funds) operate in the same way.

For heightened risk, you can invest in an ETF that tracks the price of a commodity, such as gold, or a unit trust fund that invests solely in a certain sector of the JSE, such as financials, commodities, industrials or property. Beware: be prepared for high volatility or long periods of under-performance.

Investment costs on equity funds are lower than on multiasset funds (they average about 1.5 percent, but a few are more than three percent), and the lowest of all are the index-trackers and ETFs (mostly about 0.75 percent).

Besides tax on interest, higher-risk unit trusts also attract dividends tax (15 percent, taxed within the fund) and, when you cash in your investment, capital gains tax. For a low-risk investment in which to tie up your money for at least five years, you have a number of choices:

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five years is the maximum term at most banks. Of all fixed deposits, these offer the highest rates – between 8.2 and 10.25 percent ( more than 3.5 percentage points above the inflation rate).

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the five- year fixed- rate bond offers nine percent, while the five- and 10-year inflation-linked bonds offer CPI plus two percent and 2.25 percent respectively.

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These policies, offered by the life assurance companies, are for a minimum of five years, and can be for any term longer than that. You can choose the underlying investment/s, and for a low-risk investment you can choose low-risk unit trust funds or the life assurer’s guaranteed or smoothed- bonus funds. The former guarantee you at least your capital on maturity; the latter “smooth” returns to counteract market volatility. There are penalties if you withdraw your money early, and the returns are taxed within the portfolio at 30 percent, so such a product makes sense only if your marginal income tax rate is above that and you are likely to earn interest that exceeds the annual tax exemption of R23 800 (R34 500 for pensioners). Another positive feature of endowment policies is that they pay out immediately to your nominated beneficiaries on your death, unlike most other investments, which become liquid only once your estate has been wound up. Watch out: the costs on these products can be relatively high (as much as four percent or more on five-year investments; reducing on longer-term ones).

• if your sole purpose with your lump sum is to boost your retirement savings, and you are prepared to wait until you turn 55 to access it, an RA is a wise choice. Some or all of your investment will be tax-deductible (depending on how much you and your employer have contributed to your retirement savings in the current tax year), and the returns within the RA are tax-free. Both life assurers and unit trust managers offer RAs for lump sums. In many cases, like an endowment policy, you can choose the underlying investments, which may be low risk. Costs again are fairly high, because there are fees on the underlying investments, as well as possibly a platform fee. Finally, there are the investments that require you to lock away your money for a long period and take on higher risk. Here you are looking at either a life assurance endowment policy or, if you’re boosting your retirement savings, an RA, in which you choose underlying investments in equities and/ or listed property. Other investments that you may want to consider are shares in a listed company (R100 000 is probably the minimum amount that would be viable once brokerage costs are taken into account), taxfree savings accounts (not included because the limit is R30 000 a year, but you could stagger your R100 000 over four years), and offshore or worldwide funds. The last of these would fall into the accessible/longterm/high-risk category, because they are subject to currency exchange rates, which are notoriously volatile.