A Fin24 user writes:
I read the article entitled The power of compound interest and found it insightful.
I understand the principle and how it works. My question is, is it only unit trusts that offer compounded interest on your investment or are there other products one could look at? If so, which would be the best over the long term?
Danelle van Heerde, product actuary at Sanlam Personal Finance, answers:
It is not only unit trusts that offer compound interest, but almost all savings and investment products.
Different investment products provide different benefits to different investors, depending on their personal circumstances and investment objectives.
Unit trusts are flexible and easy to access, and often relatively inexpensive.
Linked investments offer an alternative way to invest in unit trusts, where investment funds from different fund managers can be used to construct a diversified and flexible portfolio.
Endowment policies can be attractive if your marginal tax rate is higher than 30%, but access to the funds is limited by legislation.
Retirement annuities are a very attractive investment option for retirement savings if you can deduct your contributions from your taxable income, as this means that you can save more without reducing your cash flow, and you also get the investment return tax free.
The longer the term you want to invest for, the more investment risk you typically can afford to take in order to get a higher return and really get the benefit of compound interest.
It is important to look at the expected long-term return of an investment after allowing for the taxes and fees applicable to the specific product and investment fund choice, as these can vary quite significantly.
However, beware of anything that seems too good to be true as you run the risk of losing your investment.
Based on historical performance (which is not necessarily an indicator of future performance), a medium risk investment portfolio could provide a gross long-term return of about 5% above inflation, while a high risk portfolio can provide maybe 6% to 7% above inflation, before fees and taxes.
Your investment fund choice should take into account both your personal tolerance for risk and your objectives with the specific investment, especially the investment term and whether you require access to the fund during this.
There is an enormous range of investment funds available in the market and you need to ensure that you select those with reputable fund managers that are properly registered, do not provide excessive risk relative to your risk tolerance and investment objectives, and offer good value for money.
A registered financial planner specialising in investment can help you construct an investment portfolio suitable for your specific requirements.
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