TFSAs for beginners – Part 2

Nonhlanhla Kunene
By Nonhlanhla Kunene October 6, 2015 14:03

 

Unit trusts explained

Part 1 of TFSAs for beginners, gave a brief introduction into TFSAs, touching on the different asset classes investors are exposed to though TFSAs and described exchange traded funds (ETFs). In this section we look at unit trusts as a form of tax-free investment.

Unit trusts

By Nonhlanhla Kunene

Unit trusts funds are similar to ETFs in that they are both invested in portfolios. ETFs are traded on the stock exchange, but unit trusts can be purchased directly from the providers. Unit trusts are often called “collective investment schemes” and overseas are known as “mutual funds” but they are all the same thing. Technically a unit trust is a trust that, as an owner of a unit, you become a beneficiary of. But all you need to know is that by holding units, you are participating in the overall performance of that portfolio of assets.

Usually, unit trust consist of actively managed portfolios, whereas ETFs are passive portfolios. That means that there is a real person making buying and selling decisions, whereas ETFs tend to track indices and buy and sell shares to keep the portfolio in the same proportion as the index. In unit trusts, you pay the fund manager for his/ her expertise in selecting specific shares (or other tradeable instruments like bonds, depending on the fund’s mandate). This makes the cost of investing through unit trusts more expensive. Note though that some unit trusts, like ETFs, are also tracker funds that do not require active management.

Unit trusts can be invested in local and international equities, bonds, options, currencies, cash and listed property. Exactly what the fund invests in depends on its “mandate” which is a formal set of rules for the investment strategy of the fund. The strategy can be defined by how risky it is, or what kinds of assets it can invest in, or both. For example balanced or flexible funds, can invest across a range of different instrument and increase or decrease holdings within an asset class or industry depending on market conditions.

Like ETFs, an advantage of unit trust funds is that they give small investors access to a portfolio which, ordinarily, would be very expensive to assemble. Take for example Naspers, whose shares are trading above R1 900 each, to form a portfolio in which Naspers had an appropriate weighting would require a lot of money. Pooled funds allow portfolios strategies to be pursued that smaller investors would not be able to do on their own. They also get a fund manager to implement the strategy.

Unit trusts can be accessed in TFSAs through various ways. The simplest is directly with fund management houses like Emperor Asset Management or 22seven (you can find their details in our directory). They will allow you to invest either a lump sum once off, or set up a monthly debit order to contribute into the fund. Another way is through a “linked investment services provider” platform, usually called a Lisp. These allow a single account which you can then invest in many different unit trusts through. That’s convenient if you want to be able to trade in and out of different unit trusts. You can also get exposure via a life insurance policy which can invest in funds.

Investors can construct an investment portfolio using various unit trusts with different mandates, for example to ensure diversity between asset classes and even between different industries. However, some unit trust funds offer diversity by catering for the full range of investment options.

When investing in unit trusts through a TFSA, the same guidelines apply as with other tax-free investments; investors have an annual tax-free limit of R30 000 and a R500 0000 lifetime limit. Interest earned is also free of tax and can be reinvested without affecting the annual and lifetime limits.

 

-Sources:

http://savetaxfree.co.za/the-basics/

http://www.businessdictionary.com/definition/unit-trust.html#ixzz3k0LEvVzn

Nonhlanhla Kunene
By Nonhlanhla Kunene October 6, 2015 14:03
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