I would like to know the best way to go about investing in shares for my grandchildren (aged 1 and 2). I have the following questions:
- If I want to purchase shares in units of R1 000, where would I get these shares? Is there a walk-in place where such shares can be purchased or do I need to have a financial advisor?
- What type of shares would be best and which companies would you recommend?
What a wonderful legacy to be able to invest for your grandchildren’s future.
In answering your questions, I have assumed that the intention of the investment is to have the funds grow over the long term, hence the specific questions around investing in shares.
Although there are a few trading platforms where it is possible to invest directly on the stock market with a debit order of R1 000 per month, I would not recommend this due to the relatively high transactional costs thereof, as well as the inability to invest in a well-balanced and diversified share portfolio. Investing into one or two individual shares exposes you to significant risk, which could jeopardise the whole investment. Think for instance about investors who held most of their wealth in one share like Steinhoff, or more recently Tongaat Hulett.
You can access well-balanced, diversified share portfolios by investing in an equity unit trust portfolio, or an exchange-traded fund that tracks an index on the JSE for instance. The key benefit of investing in a diversified portfolio is that it helps to minimise the risk of capital loss to your investment portfolio. It aims to maximise returns by investing in different shares that would each react differently to the same event.
Most investment professionals agree that although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimising risk.
A further advantage of investing in an equity unit trust portfolio as opposed to a direct share portfolio is the difference in how capital gains tax (CGT) is accounted for. If you hold a direct share portfolio, any capital gained from selling a share needs to be accounted for by the owner. A person investing in an equity unit trust portfolio is on the other hand not liable for any trading of the underlying shares held in the portfolio. CGT is only applicable once there is disinvestment of the units held in the portfolio.
There are many excellent asset management companies in South Africa that you can use to invest in a portfolio of equities through an equity-specific unit trust portfolio, including companies such as Allan Gray, Investec, Glacier, Coronation and Sygnia, to name just a few.
You can approach the asset management company directly in order to set up an investment. Alternatively, you can employ the services of a financial advisor, who will assist you in choosing an asset manager and setting up an appropriate investment. To gain exposure to the stock market, you would need to invest in the asset manager’s equity fund which essentially pools investors’ money into a well-diversified equity portfolio, which is not generally available to the individual investor.
Most unit trust companies are willing to set up such an investment with a minimum debit order of R500 per month, which allows you access to their equity unit trust scheme.