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High risk with low tax implications?

Reader’s question answered.

JOHANNESBURG – In this investment column Andrea Bezuidenhout, advice partner and a certified financial planner at The Wealth Corporation, answers a reader’s question about long-term investing.

Q: I want to invest R200 000 for a 15-year period.

1. Which fund can I invest in that has a high risk and low tax implication?

2. Should I use a broker or go directly to an investing entity?

A: To give proper advice we would need further information to what is supplied.

An assumption that I’m making is that these are discretionary savings and would not be placed in a contractual savings vehicle (like a retirement annuity) that would be subject to the rules of Regulation 28 of the Pension Funds Act which limits the scope of underlying fund choice.

In terms of which fund to use, you could look at utilising any unit trust type fund from various investment providers. When you refer to high risk (and the connotation of associated high returns), the general association to this would be the equity market and the use of high equity funds. Whilst we have been in a sustained bull market over the past few years our expectations of the equity market going forward would be that of more muted returns rather than the expectation that we will continue to receive the type of high returns that we have experienced in the recent past. That being said, over long periods of time the equity market has consistently provided good returns and is a solid asset class to be in over sustained periods.

With regards to tax implications, in this scenario a unit trust type investment would provide you with interest income (dependent on funds selected) which is subject to an annual tax exemption and thereafter taxed at your marginal rate; dividend income which is currently taxed at 15% and capital gains on which you pay capital gains tax when any gains are realised (i.e. units are sold) which is currently taxable at a maximum of 13.33% if you are in the 40% tax bracket.

We do advocate that you consult with a professional financial advisor to ensure that a holistic view of your needs is taken when looking at any investment. Even in this simple scenario there are other factors that should be considered such as the specific use for the funds after the 15 years, what other savings/retirement provisions are already in place, the age of the investor and the current tax bracket of the investor – each of these could impact the way in which the funds could best be invested.

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