Risk of churning as switching between funds has never been easier

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Colin Anthony 11 June 2015

One of the key ambitions for tax-free savings accounts (TFSAs) is to make them as cheap as possible. TFSA providers just about across the board have whittled costs down to minimum levels – getting into the spirit of promoting a savings culture as envisaged by National Treasury but also for competitive reasons. But one consequence is that a TFSA client can now switch between the various funds offered by an investment house, often at no cost, raising the prospect of unnecessary churning.

Both PSG and Investec offer their own funds as well as funds from other investment houses and the JSE’s Satrix funds all through a single TFSA account. Neither charges anything to switch from one fund to another within the accounts, even when switching to a fund from another firm. Other firms have similar offerings.

The normal deterrents to trading between funds – costs and tax implications – have been eliminated.

Effectively both PSG and Investec TFSA clients have a range of more than 50 funds to choose from, and they can switch at will between those at no cost within the tax-free shell.

One of the reasons that National Treasury did not allow TFSAs to invest directly in JSE-listed companies was to discourage churning – constantly buying and selling shares based on short-term factors. Instead, stock market investments can be accessed within a TFSA through various exchange-traded funds.

Switching between unit trusts has always been possible with the main deterrent to churning being capital gains tax that is triggered whenever you sell out of a fund. With the TFSA structure, that falls away.

Bearing in mind that one of National Treasury’s goals in introducing TFSAs was to encourage first-time investors, many account holders might not be aware of the benefits of long-term investing, nor of the pitfalls of churning. A common mistake of novice investors is to be swayed by short-term market news and they are most at risk of selling low (by panicking when they hear bad news) and buying high when they follow the herd on good news.

It is important, particularly for first-time investors, to bear in mind that unit trusts are long-term investments, cautions Tracy Gill, an analyst at PSG Wealth. “Investors should consider staying invested in a fund for at least three years in order to benefit from the fund managers’ long-term strategy, taking their fund mandate into consideration.

“It is better to choose funds based on the investor’s risk profile and invest in a portfolio of funds with a long-term view, rather than chopping and changing and trying to time the market. Rather leave that to the experts, and let the professional fund managers actively manage the assets within the funds.”

Should an investor’s circumstances change, or should their appetite for risk change, they would need to revaluate their portfolios.

Gill also points out that there is a general capital gains allowance of R30 000 a year that applies to non-TFSA investments. “For the first R30 000 of capital gains on your investments (unit trusts, other investments or any other capital gain), you will not need to pay capital gains tax.” As switching within a TFSA is exempt of any capital gains tax, it will not be included in the R30 000 exemption from the other investments you may have. The reporting burden may act as sufficient disincentive, though.

With TFSAs that give access to large ranges of funds, it has never been easier to churn.