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What to do with R5m to spare?

Oct 11 2016 18:32
Carin Smith

A Fin24 user has R5m to invest and needs some advice. He writes:

I am 57 years years of age, with no medical aid or pension. Currently I am on sabbatical and have R5m to invest.

What do you recommend an investment portfolio should comprise of in order to grow the capital securely?

Gustav Potgieter CFP® of the Aurum Trust responds:

Unfortunately, the information supplied is very limited, so I am going to concentrate on the part about secure growth of the R5m that is not in a retirement fund.

Low risk

Unit trust money market funds normally yield higher returns than banks' money market funds. I call it low risk, because there could be risk in some of the underlying instruments, like the African Bank saga.

Should you decide to invest the R5m in a unit trust money market fund and it earns the average of the industry over the past year, your return would have been 7.62%, before tax.

The interest earned (only income, you are on a sabbatical):             R381 000
Less: Interest exemption                            R23 800
Taxable interest                                R357 200
Less: Income Tax                                R67  512

Nett Income including interest exemption                    R313 488

Return on capital                                6.27%

Nett Investment:                                R5 313 500

Important: The past year’s return was higher than the past 5 years.

Best fund performance over 1 year:                        7.73% annualised
Worst fund performance over 1 year:                    6.97% annualised

Low to medium risk

In this space, I would recommend multi-asset low equity funds. Their benchmarks are normally money market plus 2% or more or CPI plus 3% - 5%.

These funds are ideal with a 3 – 5 year investment horizon in mind and will attract income tax on the interest, CGT and dividend withholding tax. Dividend withholding tax is already deducted in the performance figures.

The average return for the multi-asset low equity fund sector was as follow:
1 year:            5.81%
3 years:            7.53%
5 years:            9.58%
                    
Best fund performance over 3 years:                    10.81% annualised
Worst fund performance over 3 years:                    3.19% annualised

Medium risk (pension fund type investment)

In this space, I would recommend a medium equity multi-asset funds. Their benchmarks are normally CPI plus 5% or more.

These funds are ideal with a 5 year plus investment horizon in mind and will attract income tax on the interest, CGT and dividend withholding tax. Dividend withholding tax is already deducted in the performance figures.

The average return for the Multi-Asset Medium Equity fund sector was as follow:
1 year:            5.18%
3 years:            7.97%
5 years;            11.86%
            
Best fund performance over 5 years:                    16.25% annualised
Worst fund performance over 5 years:                    0.46% annualised

In summary:

Your investment horizon and appetite for risk, will determine the applicable investment, that is suitable for you. There is no mention about any other assets, but as a thumb suck, R5m will give you a monthly income of about R22 500, before medical aid and so on.

It is important to invest in tax-efficient, inflation beating investments, because of your age and longevity that is becoming a bigger and bigger concern.

I recommend that you contact a professional financial adviser, preferably a CFP, to ascertain the right investment, tax -wise and that suits your profile and needs.

Disclaimer: The above article does not constitute financial advice and is not a recommendation. Investors must always seek the advice of professionals and trade with caution. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

investments  |  money  |  money clinic
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