I have R915 000 to invest for 18 months, when my son will be going to a tertiary institution. Which is the best vehicle to use?
First and foremost, the foundation of any investment consideration is to understand the current standing of the investor and their goal moving forward. The information that follows is based on an investment horizon of 18 months, before the first withdrawal from the portfolio will be required and does not take any other considerations or assets into account.
We are also taking it at face value that the full amount will be required during the duration of the studies. It would be safe to assume that the investor’s goal is to maintain the capital value, while outperforming inflation, in order to have the funds available to fund their son’s tertiary education.
There are two questions we must answer, the first being the appropriate investment portfolio and secondly the investment vehicle/structure.
A time frame of less than two years is considered a short-term investment horizon. The longer the period of investment, the more time the portfolio will have to recover from negative market movements. Therefore, this investment cannot be exposed to too much volatility (market movement) as this could result in a negative return over the short term, especially as the first withdrawal will be in 18 months’ time.
A short-time horizon, as in this case, means a conservative portfolio, which means lower return. With the information discussed above, an income fund will be best suited for your needs.
When selecting the actual fund in which to invest, I recommend that you consult a certified financial planner to ensure that you make an informed decision. This type of portfolio is a prime investment for the short term (18 months), while maintaining the investor’s capital and generating an income. With these funds the focus is normally to place the investment in interest-bearing assets. The time frame is long enough for positive returns, but too short for a long-term commitment. Thus, the goal in the 18-month period is capital preservation while achieving a higher return than that of traditional money markets and to beat inflation.
When looking at the appropriate investment vehicle, a unit trust would be best suited for your needs. This is a flexible savings investment that allows you to accumulate funds through a range of investment strategies and make withdrawals when you require the funds.
Unit trusts are well regulated, and the investor is not tied to a fixed investment term nor are there any penalties or fees on disinvesting (withdrawing).
Your investment will reflect the units that you hold within your investment strategy. The value of your investment is directly linked to the market value of your investment strategy. This is not guaranteed and will fluctuate in line with market movements. Your contributions and positive investment returns increase the value of your investment. Negative investment returns, fees and charges may reduce the value of your investment.
The one element we can’t ignore is the possible tax consequence of your investment.
As this is a conservative portfolio, a big portion of the growth on the income fund will be interest and this could have a tax impact, especially if you have other investments that earn interest. At this present time, taxpayers are entitled to an interest exemption of R23 800 per tax year for those under the age of 65.
Unit trusts allow investors to use this exemption by investing a portion of their unit trust holdings in interest-bearing funds, which will be the case in an income fund. Furthermore, those that invest in unit trusts are allowed to use the annual capital gains tax exclusion of R40 000 (or R300 000 on death). As a result, investors will be able to make withdrawals annually. If the gain in these withdrawals is below R40 000, they will not be liable to any capital gains tax on their investment. With an income fund capital gains tax is not such a consideration.
The overall outcome of the aforementioned advice should result in capital preservation for the investor, with the potential upside in realised gains that is associated with an income fund and interest-bearing assets. The investor should maintain their original capital for the 18-month period, being able to comfortably afford their son’s tertiary education while having their money work for them and generate an income.