What to consider when investing in South Africa

Choosing the right investments in South Africa can be a challenging process, with many questioning where to begin.

According to Tshililo Mthethwa from Nedbank Private Wealth, investing involves putting money into buying or holding investment products with the goal of growing that money for a specific goal or creating wealth.

Mthethwa said that investment decisions should consider your and your dependent’s holistic financial needs.

In this discussion, a few things are established:

• The first three tiers of your needs (covering essentials, meeting lifestyle needs and being prepared for an unexpected shock) are taken care of.

• You have sufficient emergency funds, e.g. 3 months’ worth of your salary.

To achieve goals or leave a legacy, there are many factors that need to be considered when choosing investment.

Goals

“You should be clear on what need you are trying to meet,” said Mthethwa.

“Are you seeking to meet a future goal like buying a house or a car at a certain time in the future? Maybe all your needs have been met and you are seeking to grow your wealth? It could also be for your future retirement provision, etc.”

Investments are classified into two categories:

Discretionary Investments are done for purposes other than retirement. They generally feature no tax benefits (unless the products are held in an endowment or tax-free investments) and there are generally no limits in terms of access and pay-out.

Compulsory Investments, on the other hand, are intended for retirement, and there are tax benefits that South Africans can use. There are limits to access and pay-out.

Invest

The term intended for an investment is also a key consideration.

Short-term investments have a time frame of up to three years and could involve saving for a holiday, a car or an emergency.

“Your priority is to save enough to meet your financial goal within the timespan.”

“They have less time to grow through compound interest. You should ideally save for the short term in a risk-free account that you can access easily. You will need a low-risk plan that earns interest.”

Medium-term investments have a time horizon of 3 to 5 years for goals. These can be diverse, such as education plans, saving for weddings, or funding a business start-up.

These investments can take a little bit more risk than short-term investments and afford some market-volatility, but still within reason.

These would typically have a small exposure to shares (roughly 40% exposure) while the remaining balance stays in interest-bearing investments.

Long-term investments have a time horizon longer than 5 years and can extend to as long as 50 years, such as retirement planning.  

Long-term investment instruments include equity, property, and bonds.

As these investments focus on wealth creation in the long run, they carry a higher level of risk than short- and medium-term investments.

“You need to keep close tabs on your long-term investments. Market swings can affect them negatively over the short term.”

“It’s important not to panic in such times and remember that you are a long-term investor, so you should have time to ride out these ups and downs.”

“Be sure to create room for adjustments, as your goals and plans may change over time and making the necessary course corrections will ensure that your plan remains sustainable.”

Risk Profile and Strategy

Risk tolerance needs to be considered when making an investment, and looks at the volatility that an investor is willing to live with on the way to their goal.

Risk capacity looks at the amount of risk that one can afford to take. One should ask themselves “what happens if things go wrong?”

There is also risk required, which measures the amount of risk that one needs to take on to achieve one’s goals.

Liquidity

If funds need to be acquired at any given time, the investor will need to make sure that they understand the investment vehicle they are investing in and whether they are allowed to access their funds.

If they are allowed to access their funds, they should also check to see if there are any penalties payable or not.

“Ideally, if you are investing in riskier investment, you should not be looking to access the funds in the short-term as there is volatility.”

Tax Consideration

Different investments have different tax implications and benefits.

“It is ideal that you utilise all the tax benefits that are offered by Sars when investing as this leaves more money available to achieve your goals.”

“You would also need to balance the marginal tax rate with the tax that is payable within the investment. The aim is not to avoid tax, but to optimally utilise investment structures in a tax efficient way for yourself.”

Fees and Charges

Every investment has fees and charges, with some that are negotiable and others that are not.

All fees applicable should be balanced against the expected returns of the investment.

“Ensure that you are the target client for the investment that you settle on as that also informs the fees payable.”

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