Easy guide to investment “speak”

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The key to making the most appropriate investment choice is often simply asking the right questions based on your specific goals and objectives. Poor results can often be avoided by asking the right questions which go hand in hand with an understanding of crucial investment concepts.

We have detailed below an explanation of four very important investment concepts that we believe every potential investor should be familiar with before committing to any investment plan.

  1. ASSET CLASSES

An asset class is a collection of investment instruments which display similar risk and return characteristics and therefore behave similarly in various market conditions. In general, there are four main asset classes:

Equities: shares in companies listed on a stock exchange.

Listed property: shares in a company that typically owns commercial and industrial buildings.

Bonds: a contractual agreement in terms of which a borrower pays a lender, the investor, a pre-determined interest payment and return of capital at a predetermined maturity date.

Fixed interest instruments: money market accounts, cash and the like.

  1. INVESTMENT RETURNS

Investment returns are the gains or losses in the value of an investment over a specified time period and may take various forms, such as:

Interest income: income received at predetermined rates and intervals as stipulated within the agreement between lenders and borrowers of short term funds

Dividends: the portion of a company’s profit that is distributed to shareholders based on the number of shares owned.

Capital gains: the increase in the capital value of an investment from its initial or base cost.

  1. TAXATION

The taxation of an investment is an important consideration for an investor as this directly impacts the final returns earned. The following are examples:

Interest income earned by individuals is taxed as personal income at the investor’s marginal rate. There is an amount of annual interest that is exempt from tax for individuals. The exemptions for the 2018 tax year are R23,800 for individuals under 65 years old and R34,500 for individuals over 65 years old.

Dividends received by investors are taxed on a withholding basis at 20% of the value of the dividend in the hands of the investors.

There is a further tax that may arise as a result of capital gains made on your investments. The maximum effective rate at which an individual will pay tax on capital gains is 18%. Capital gains tax is not a separate tax, but sees the capital gain, subject to a formula, being added to the investor’s taxable income. Please consult your tax advisor, or call our office, if you have queries in this regard.

  1. FEES

The Association for Savings and investment South Africa (ASISA) has developed a standardized approach to disclosing the costs of investment products. This is so that the costs of different investment products can be compared. This is known as the Equivalent Annual Cost “EAC” standard. It requires that the following charges be disclosed:

Fund Manager Charges

These are the fees charged by asset management companies e.g. Coronation Asset Managers.

  •  Advice Charges

This refers to financial advisor fees and may include initial fees and annual fees calculated on the assets under management.

  •  Administration charges

These are all fees relating to the administration of a financial product charged by LISP platforms.

  •  Other charges

These refer to all other remaining charges that an investor will incur. Charges include termination charges, penalties, guarantees and wrap fund charges.

The above investment concepts provide a basic introduction to investments. We recommend that you consult an independent financial advisor who will be able to provide advice on these concepts and everything else you may need to know to help you achieve your investment goals.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Wayne Visser
Managing Director
FPM Risk and Wealth Management
wayne@fpm.co.za
011 778 9300

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