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How to choose the right funds for a tax-free savings account

Reader’s questions answered.

CAPE TOWN In this advice column Beata Carstens from Veritas Wealth answers a question from a reader who wants help with choosing products for his tax-free savings account.

Q:  I opened a tax-free savings account last year and am investing the full allowed R2 500 per month. I am 28 years old and this forms part of my retirement planning. Of the monthly contribution, 20% goes to a Swix index tracker fund, 30% to a Divi index tracker fund and 50% to a listed property index tracker fund.

As you can imagine, the investment has performed poorly up to now. I am getting a little concerned that the funds I am investing in might not be the best choice in today’s market. What is your opinion on these funds today? Do you think I missed the boat on listed property? Is investing in Divi and Swix tracker funds still a good idea or should I rather look at a balanced fund or an international fund?

I don’t plan to move any of the money I have invested in the current products. I am just re-evaluating the investment of my monthly contributions going forward. I don’t want to overreact or make emotional decisions about this, but I also don’t want to ignore the fact that the investment environment has changed since last year.

I would like to congratulate you on your decision to use your tax-free savings account as part of your retirement planning. The biggest saving the tax fee savings account offers an individual is that you pay no capital gains tax when you withdraw money, and having a tax-free income can have a big impact in your retirement years.

The R500 000 that you are currently allowed to invest in a tax-free savings account during your lifetime is equal to investing R30 000 a year for 16 years and 8 months. The good news in your case is that if you plan to retire at age 65, your annual allowance will be invested for just more than 22 years before you start using it. That means it will be compounding during that time, and you will not have to pay any tax on the gains.

In order to maximise your return on your investment over time, however, you need a clear investment strategy to guide your decisions over time. You appear to appreciate this, as you mentioned that you do not want to make emotional decisions about your underlying investment funds.

You also realise that the investment environment has changed since last year. But if we assume that your investment period is nearly 40 years, we would expect things to change regularly over this time.

As a start, you need to write down your profit objective for your investment. You can then design an investment strategy that will give you the best chance of meeting this goal.

I cannot advise you exactly which funds to invest in, but I can give you some things to think about.

Your time horizon allows you the luxury to invest in more aggressive asset classes such as equities and listed property. Investing in these growth assets over a period of time gives you a high degree of certainty that you will beat inflation on average by 7% per annum. If you can handle volatility in the markets, then you can set that as your objective.

The next step is to design your investment strategy to be robust enough to cater for different market conditions. That means being exposed to different drivers of returns.

For example, the Divi index is essentially a value index and will perform well when that ‘style’ is being rewarded by the market. It however will also go through times when it under-performs, such as it did last year.

Similarly, there will be periods when local equity performs well, and other times when international equities deliver better returns. It is worth considering whether you should be always exposed to both, or if you can make informed decisions about when to direct your contributions to one or the other.

An important decision you need to make in this regard is whether you have sufficient knowledge of the markets to handle investments during different market cycles or whether you are prepared to pay a fee for a professional to handle your investments for you.

While crafting this investment strategy is vital, just as important is having the discipline to stick to it.  You should also have a system in place for measuring the effectiveness of your investment strategy over time.

Just bear in mind that great tactics may win battles, but well thought out investment strategies win wars.

Beata Carstens CFP ® is the head of the Veritas Wealth Paarl office.

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There is another selection method. It involves the use of a small sharply pointed object piercing a sheet of paper or similar.

Coronation recommended their Coronation Global Managed Fund for tax free investments in their latest newsletter. I put R10 000 with them just over a month ago and it has grown 8% . (OK, the markets were strong over the period ;-)). I also put R10 000 with Foord Flexible fund and it has also done well. I think that investing in those kinds of funds, i.e. leaving the asset allocation to a fund manager who has built up a good reputation over the long term and sticking with them is the way to go. I have certainly learned that sticking with good fund managers over the long term, even through periods of underperformance pays in the long term. I don’t mind paying management fees for this. I also like to read their quarterly reports eg Corospondent, Allan Gray Quarterly reports and Gray Issues. There is a lot of wisdom to be found there. In 2010/2011 Allan Gray hinted that local markets were fully priced and offshore markets offered better value. I moved and had to wait a while but in 2013 my pension preservation fund exploded (80% for the year). It was invested in the Global Equity feeder fund. Good luck.

So Mr Beata, the oak is trying to make some smart decisions and all you give him is a feedback on one fund out of the three and tell him to fill your pockets if he wants more info..! rather than give him a few options with pros and cons.
Well, reader.. i would recommend a few options firstly:
– I like the index tracker route uv taken on this long term investment and the diversification of these trackers selected, but there is never a best selection of ETF’s.
In my view, consider the ETFSA tax free savings account- They have a portfolio of 4 or 5 ETF’s in their Tax free savings account which they change as the markets behave over long periods of time.
The other option if you want to invest yourself directly is to look at the Easy equity option and select your own ETF’s from the list they have, the only hasstle being they dont have a debit order yet and you will need to buy them every month.
In terms of choosing the right index/ ETF goes- There is no right formula, not even Mr Beata can help you there, want you want to do is to have enough diversification so as to not limit yourself to a particular sector/category of index tracker funds. The INDI has outperformed all the other ETF’s over the last 20- 30 years on the ALSI, so thats something worth tracking, Add to it the exposure in property (Proptrax ten)and offshore (DBX World) always improves the diversification.


They have since updated their website and do offer recurring investments

Buy the Intelligent Investor by Benjamin Graham (

Read it.

Buy only MARKET index ETF’s that we have available to us in South Africa:

Avoid actively managed funds – too expensive and won’t beat the market in the long run.

Keep reading the Intelligent Investor and stick to your guns despite what anybody else tells you.

Seems like good recommendation. How about active funds that have variable performance fees- low fees if close to benchmark, much higher fees if far exceeds benchmark. Like Coronation top 20.

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