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My unit trust fund investment hasn’t accrued in value

What should I do to ensure I get some income from this investment?

I am 65 and retired. I could only invest R500 000 in a medium risk equity/unit trust fund with emphasis on growth. My money has been invested since 11/05/2015. Up to date it has remained at R500 000. Going up and down each month. I am very worried as this money has to start supplementing my pension with at least R2 000 pm soon. What am I to do? Wait and hope… or invest somewhere else? I realise that I will lose money, and with interest taxed at a bank I might also invest at a loss after inflation. I would appreciate any advice.

Marise Smit - Brenthurst Wealth

The disappointment felt by equity investors over the last three years is completely understandable, with South African Multi-Asset Medium Equity funds returning 5.17% annualised, barely beating CPI (by 0.11%). Over longer investment periods, one could reasonably expect a medium equity fund to return CPI+ 3%, which these funds did manage to achieve over the previous 10 years.

Please note that to provide appropriate advice, suitable to your needs and financial goals, a better understanding of your personal circumstances and risk tolerance would be required. With full disclosure, the appropriateness of your current unit trust could be reviewed to determine the suitability of the existing asset allocation, also taking into consideration the current market environment.

Although medium equity funds aim to achieve a return of CPI+ 3%, these returns are not guaranteed, and a certain level of accompanying volatility should be expected. This is where it is important to analyse your tolerance towards risk as well as your capacity to take on risk.

Taking into consideration your near-term need to supplement your retirement income, it is very important to understand the effect that an income drawdown can have on the capital invested over the investment horizon. Assuming CPI is 6%, a return of 9% and a 30-year investment horison, a monthly income drawdown of R2 103 would be sustainable, with this income increasing by 6% per annum to keep up with inflation. This scenario results in the capital amount being depleted at the end of the investment term.

Note that as a rule, for someone at the age of 65, it would be more suitable to start with a 4% drawdown rate per annum, since the returns from these investments are not guaranteed or smooth (as assumed in the above example). Using the same assumptions as before but reducing the initial drawdown to 4% per annum (roughly R1 667 per month/R20 000pa), you reduce the likelihood of depleting the capital amount over the next 30 years.

Although we face a variety of challenges in the current environment, they are not unique and similar circumstances have bene faced historically. In a diversified portfolio, a return of CPI + 3% should be achievable over the long run. The strategy of the portfolio should be diversified across asset classes, with a bias towards offshore assets.

The alternative option would be to invest in a fixed interest investment and draw down on the monthly interest earned. This could be an appropriate option if you are a highly conservative investor and assuming you have no other interest income, making the tax consequences irrelevant.

Fixed term investments offer higher fixed interest rates. If I assume a five-year fixed term investment, offering an 8.75% nominal interest rate, your income could be up to R3 645 per month with your capital amount of R500 000 being secured and available again at the end of the investment period. Although this is a conservative investment solution, there are still risks involved – specifically liquidity risk and most notably – inflation risk. Because your capital amount is still R500 000 at the end of the five years, inflation would cause the gradual reduction of your purchasing power.

There are also options available to only draw a percentage of the total interest per month, resulting in compound interest being earned over the fixed term. For example, if you choose to only receive R2 000 per month over the term, your capital amount would be R608 980 at the end of the term. But assuming a 6% inflation, the purchasing power would still be less that 5 years ago, and the income you receive would buy you less and less each year.

It is also important to note that drawing an income from a flexible investment would attract a lower Capital Gains Tax, whereas a fixed deposit could attract tax at your full marginal income tax rate.

For a long-term investor, choosing to invest in cash could result in the gradual reduction of your capital purchasing power. It is important to consider investment solutions that would be appropriated keeping your longterm needs and requirements in mind and to avoid making long-term decisions based on shortterm viewpoints.

Do you have any questions you would like answered by registered financial planners?

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