You need to take your personal circumstances into consideration but here are some points to consider:
Beware of cash:
Over time cash will not keep up with inflation so unless you are only saving for one or two years, it is best to invest in a growth asset like equities (shares). If however you have a shorter time horizon and want to be in cash there are three products worth considering.
- Savings account with Capitec. This bank offers excellent interest rates and you can fix your interest rate even if you are saving on a monthly basis.
- Money market unit trusts: these offer better returns than a bank account although the returns will fluctuate. Most unit trust companies offer a money market fund.
- RSA Retail Bond: You can invest in this through the National Treasury website and it gives excellent interest rates for 2,3 and 5 year investments however it is only for a lump sum investment not a monthly debit order.
Where to invest:
Unless you have a lump sum and have a good understanding of the share market, it is not advisable to invest directly into shares. Rather invest in a unit trust or an exchange traded fund (ETF) that in turn invests in a range of companies on your behalf. To invest the minimum monthly debit order is around R300 a month for most of these investments.
As a starting point something like the SATRIX RAFI is a good start. It is low cost and tracks some of the larger companies listed on the JSE. For further information you can go to www.satrix.co.za.
If you want to invest in unit trusts there are over 800 funds available so it can be a bit daunting. Focus on well known fund managers that have a proven track record. The benefit of a unit trust over an exchange traded fund like SATRIX is that unit trusts invest across a range of assets like shares, cash, property and bonds so they can lower the risk of your investment.
Be careful of Fund of Funds, for a small monthly debit order the additional costs are not always justified. If you are investing R2000 a month then you could consider investing in a portfolio of unit trusts through www.investonline.co.za.
One of the biggest impacts on your returns will be the costs incurred so make sure you understand the costs of the investment.
Initial fee – this is taken off your investment before the money is invested every month. If you are investing R300 and the initial fee is 3% then you would only have R291 invested. This fee is charged by the unit trust company although some companies like Investec, Coronation and Allan Gray have waived this fee. If you use a financial adviser he or she could also charge an initial fee to cover the cost of advice.
Annual fee – this is charged by the unit trust company and is usually around 1.5% per year on the total value of your investment. The financial adviser could also take an annual fee. The best way to find out the costs is to ask for the Total Expense Ratio (TER). This will include all the unit trust fees but not the financial adviser fee. One of the reasons I like exchange traded funds is because their fees tend to be lower than unit trusts.
While an equity investment like a unit trust or exchange traded fund is expected to double your money every seven years, you need to remember that this return is NOT in a straight line. Last year for example the JSE All Share Index (the combined performance of all the shares) delivered a return of 40%. The year before it delivered a negative return – so you would have lost money. If however you averaged the return out over the two years you would have a 20% return. So be careful of just looking at annualised performances over time, they do not show the volatility (the gains and losses) but just the average return over that time. For this reason you need to have a longer term view. If you are going to need this money within the next year then stick to cash.
Power of the debit order:
One of the best ways to invest is to have a monthly debit order. Firstly this means your savings go off before you can spend the money! Secondly you do not have to worry about whether the share market is cheap or expensive because you will be buying regularly every month and over time you will have paid a fair price for your investments. You will be amazed at how quickly your money will grow. For example I started to invest R200 a month for my son about 6 years ago and today that investment is worth R30 000.