Three questions a DIY investor needs to ask themselves before investing

Three questions a DIY investor needs to ask themselves before investing

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  • How do I know whether this investment option/fund is right for me?
  • How much am I paying and what services do I receive for this fee?
  • Which taxes have been deducted from my investment and which ones am I liable for?

Do-it-yourself (DIY) investing appeals to a range of investors who prefer to manage their own savings and investments. Some people speculate and try to make as much money from the markets while others just invest for a specific goal and feel that they don’t require advice. Investment goals may include saving for your retirement, children's education or a personal goal such as saving for a deposit on your first home.

The savings and investment landscape with so many different options on offer, can seem like a minefield for DIY investors.  Even the most informed investors battle to compare the pros and cons of all the different savings and investment options. These range from investment options that come with guarantees and lock-in periods, to others that have ‘bonuses’ if certain conditions are met it’s hard to decide what the best option is for you.

To help navigate this maze of investment options ask yourself these three questions:
• How do I know whether this investment option/fund is right for me?
• How much am I paying and what services do I receive for this fee?
• Which taxes have been deducted from my investment and which ones am I liable for?

How do you know whether the investment option/fund you selected is right for you?
The simplest and most transparent investment vehicles are probably Collective Investment Schemes (CIS) such as unit trusts and exchange traded funds (ETFs).  There are currently over 1 500 CIS funds in South Africa – of which 168 follow rules-based investment strategies (1) (unit trust and ETFs combined).

Realistically, most people will only consider investment options provided by known brands such as the big asset management firms, banks and life insurance companies. However, even with this filter, you will still be looking at a couple of hundred funds to choose from - which is still a difficult task.

All CIS funds in South Africa are classified in categories provided by the Association for Savings and Investments South Africa (ASISA). The most popular and largest category is the South African Multi-Asset category which includes funds which invest across a range of different asset classes, including offshore. The South African Multi-Asset category is subdivided according to the amount of equities (shares) a fund may invest in and in this way, it helps investors match funds with their different investment objectives. Generally, the more equities a fund holds the longer the investor needs to stay invested as equity markets can be very volatile.

A good starting point when choosing an investment is to assess if it is appropriate for the time frame that you a looking to invest for.  Usually the minimum investment period on the fund’s minimum disclosure document. Aligning your investment goal and time-frame with an appropriate fund will decrease the chances of being disappointed.

How much are you paying and what services do you receive for this fee?
Fees is a very important aspect of an investment and it’s crucial to make sure that you are aware of all the fees that you will be paying before you invest in a fund.

Some DIY investors prefer to only make use of rules-based investment strategies – especially ETFs via a stock broking platform –  as the fees and charges are perceived to be less than the equivalent unit trusts options. Over the past few years single asset class equity and property ETFs have seen decreases in investment management fees which makes them attractive investments.

However not all fee disclosers are equal and there are a few important things to consider when using these products:

• The Total Investment Charges (TIC) stated on the minimum disclosure documents of these ETFs do not include the cost of accessing the product, for example the stock brokerage fee and bid-offer spreads. In fact, there may be over 10 different types of   additional costs that could be applicable in using these funds via a stock broking platform (2).
• As these ETFs are single-asset-class investments you need to select the different funds yourself and combine them so that you have a portfolio aligned to your investment goals. This means that you need to take on the role of a portfolio manager and do your own fund selection and asset allocation.
• If you are saving for retirement, your portfolio must comply with Regulation 28 of the pension funds act - which means that you will have to monitor your portfolio to make sure that it remains compliant and rebalance (sell from one fund and buy into another) from time to time. Most platforms only allow you to use retirement bundles which have higher total costs than traditional actively managed unit trusts and so don’t offer any cost advantage.

Take time to research different investment products online and closely examine the fee structures and disclosures before you invest. Make sure that you are considering not only TICs but all of the fees you will be paying when you do comparisons between options.

Which taxes have been deducted from your investment and which ones are you liable for?
The different types of taxes and their treatment is one of the main reasons why the investment landscape can be so complex. To further complicate matters these taxes are treated differently depending on the investment ‘wrapper’ they are housed in, example a Retirement Annuity, Tax Free Investment and discretionary unit trust/ETF will all have different tax treatments. The table below covers the investment ‘wrappers’ and the treatment of taxes during the investment’s life cycle:

Discretionary investors are liable for tax on interest amounts above the interest rate exemption on an annual basis. This will normally be at your marginal tax rate. Similarly, foreign interest is also taxed at your marginal tax rate – however, there is no interest rate exemption so the whole amount is taxable.

The tax of dividends received inside an investment portfolio are typically withheld and not paid to the investor. You are therefore typically not liable for paying dividend taxes, which is why they are often referred to as dividend withholding taxes (DWT) as they are already deducted and paid on your behalf. However, some South African shares are listed on foreign exchanges and are subject to different dividend withholding tax rates, for example Richemont which is subject to a higher DWT. In these cases, the double taxation agreement between the investor’s country of domicile and the investment’s country of domicile must be taken into consideration. These DWT are typically recouped by the fund manager within a CIS portfolio but not within a share portfolio.

The same complexity arises when investing in funds which invest in offshore shares and/or are also domiciled outside of South Africa. Here we may be dealing with three or more different tax jurisdictions which would complicate things even more. For simplicity we will look at the DWT implications for a South African investing in the US equity market (S&P 500) via an ETF domiciled in the US and one domiciled in Ireland. The diagram below illustrates the two different outcomes.

The US domiciled ETF distribute the total dividends to Non-US investors but withholds the 30% DWT applicable to non-exempt investors. The South African investor can – at some expense – make use of a third party to reclaim the DWT differential of 10% between the two countries.  The Irish domiciled ETF applies the double tax treaty between the US and Ireland at a share-level and re-invests the dividends back into the portfolio. This accumulating ETF therefore reinvests the dividend after the 15% DWT is applied and does not distribute any dividends to investors in the fund. A South African investor using the Irish domiciled ETF saves around 15% in DWT, versus one that used the US domiciled ETF. This amounts to an additional 0.30% return per annum (2% dividend yield *15% DWT differential). 

Extraordinary Life and the Nedgroup Investments Core Range
If you found it hard to answer the three questions above for your own personal investments don’t feel alone! Most investors struggle to navigate the investment landscape without guidance or advice. It is for that reason we developed our digital advisor Extraordinary Life [link:] to assist you and other South Africans to navigate this landscape and assist you in achieving your investment goal.  Best of all, it is really good value for money at a fee of only 0.57% per annum (Including VAT). Once all other investment related costs are taken into consideration your Effective Annual Costs ranges between 0.67% and 0.82%, depending on the funds you use.

These low costs are made possible by using our Nedgroup Investments Core Range which is celebrating their 10th anniversary at the end of August. The three Regulation 28 compliant funds; the Nedgroup Investments Core Accelerated, Nedgroup Investments Core Diversified and Nedgroup Investments Core Guarded Funds caters for different risk profiles and investment horizons. All three funds utilise our Nedgroup Investment Core Global Fund (also available in a Rand denominated Feeder Fund) which provide broad exposure to over 11 000 global securities. Each of these funds apply the very best implementation techniques to optimise costs and taxes so that investor has the best possible chance of achieving their investment goals.

[1] Rules-based investing is the umbrella term we use to describe traditional market cap passive investments, quantitative strategies such as smart beta and multi-asset passive balanced funds. Currently all ETFs which fall under CIS follow rules-based strategies.

[2] See the cost disclosure document of an online stock broking platforms.