In the investment world investors have to make some important decisions. One of these is to choose underlying investment options that would be suited to their investment objectives, Tandisizwe Mahlutshana, Executive of Marketing, at PPS Investments writes. Making this decision is becoming more and more difficult for investors due to the many options available in the market. The latest Collective Investment Scheme (CIS) industry statistics for the year ending March 2016 showed that there were 1360 unit trusts available for investors to choose from. Therefore, in order to make this task easier, consider the points below when selecting unit trusts for your portfolio. As with any financial decision it is recommended that you consult your financial adviser.
1. Know why you are investing
There are many reasons why people choose to invest their hard-earned money. Some people would like to save for a family holiday, a dream wedding, or invest money so that they can enjoy a comfortable retirement. In fact, investing for retirement is an investment goal that everyone should work towards. Once people know why they want to invest, it then becomes easier to choose investment options that would support that objective.
2. Know your investment time horizon
An investment time horizon refers to the amount of time from the moment an investor starts investing to the day the investment matures. This can be determined by the investment goal. Short-term goals like a family holiday in a year’s time will require a different portfolio to saving for university fees in 15 years’ time. The investment horizon greatly influences the type of investment options that would be suitable. Generally an investor would want to invest in a more risky investment option if they have a long time horizon. Less risky investment options are generally more suitable for shorter time horizons. Within unit trusts the growth assets are equities, while money market and bond instruments are considered to be non-growth assets because they generate interest which is unlikely to keep pace with the return of equities over the long term. However, to ensure a diversified portfolio, an investor would generally have a combination of assets in a portfolio. Always bear in mind that a low-risk, low-return investment is very different to a higher-risk investment that requires an investor to remain invested for a long enough horizon to see the long-term gains.
3. Know the costs
Over the long term costs can negatively affect investors’ investment outcomes. It is therefore important to know and understand the costs charged by the unit trust provider. Investors should ask their unit trust providers to provide them with a breakdown of the costs they incur in their portfolios and explain how the investor pays these costs – weekly, monthly or annually. Understanding costs will be a lot simpler with the introduction of the Effective Annual Cost (EAC) disclosure method.
4. Understand the unit trust funds
It is important that clients do sufficient research on the provider of the unit trusts before choosing to place their hard earned savings with that provider. Investors have to be confident that the unit trust manager has the experience, resources, expertise and skills to manage the unit trust according to its mandate.
Furthermore, do not select unit trusts based on past performance. Past performance is not a guide to future performance. Always try to understand what drives the performance of the unit trust and the accompanying risk that it has to take to deliver those returns. Various unit trust managers employ different investment styles and philosophies. Clients need to familiarise themselves with these and understand what kind of style works best in a particular market cycle.
The reality however is that most investors do not have the time, skill or resources to do all of the above. The best way for clients to ensure that all of this research is done properly is to invest through a multi-management company. A multi-management company is an investment company, such as PPS Investments, with skilled and experienced professionals who constantly research the universe of unit trust providers and are able to make key investment decisions on behalf of the client. In other words, by choosing to invest with a multi-manager, clients do not have to worry about any investment decisions. All of that is done for them.
Article credit http://www.moneymarketing.co.za/four-considerations-when-choosing-an-investment/