Investing can help you keep with the growing inflation rates and set and achieve goals in your career. Whether it’s buying a car, owning a home, getting a car or planning for retirement, investing can cater to your immediate as well as future needs.
There are quite a few ways to invest your hard-earned money. But the terms of each of these investments, the net returns they offer on maturity and the risks associated with each of them are all different.
There is no single form of investment that is the suited for every investor. It depends on factors like investor needs, size, risk appetite, term etc.
So, we can’t classify any investment as best or worst investment options. But one can classify investments based on term or risk associated.
We look at some of the options that are available to South African Investors. Investments can be broadly classified into 3 types:
- Short Term Investments
Short-term investments are meant for those who want to save their money for a year or so with low returns to moderate returns. Short-term investors normally look for liquid assets in which they can save their money without much risk or less risk.
As these investments mostly involve low risk and thus, the returns are also low. Short-term investments can be further classified into:
- Savings Deposits or Call Deposits
A call deposit account is a type of a savings account offered by banks.
Like in a checking account, call deposit accounts offer unlimited deposits and withdrawals, and also you can have instant access to your money from an ATM, a mobile application or the like. Also, you can get interest on the amount deposited which can vary from 3-5%.
However, call deposits accounts are tier-based and usually have a minimum balance, which is necessary to be maintained to enjoy the benefits.
- Fixed-term deposits
Fixed-term deposits( or just term deposits) are also offered by banks and have a specified term of maturity.
Fixed-term deposits offer higher interest rates than call deposits. The term of the deposits can be variable. Like call deposits, the returns are based on the amount deposited.
Unlike call deposits, fixed-term deposits don’t offer withdrawals before maturity. In case of a premature withdrawal, the investor is penalized, apart from the fact that it may take several days to do so after having notified your bank.
Savings & Fixed term deposits generally have low risk as your deposit is with regulated financial institutions i.e.: banks and your funds are not affected as in case of market investments.
You need to check with your bank for types of savings & fixed deposit options available and their returns.
- Fixed-Income Investments
Fixed-income investments pay the investor a pre-decided amount of money (as interest accrued or as dividend payouts) at regular intervals of time, up till the investment reaches maturity.
Upon maturity of the investment, the principal amount is returned to the investor. Also, the amount of money received by the investor periodically is pre-decided.
Fixed-income investments include mutual funds (like money market funds) and bonds (like government and corporate bonds).
These can carry different risk profile depending on type of investment, you need to read the terms before investing.
This includes buying gold coins or bars or investing in gold funds and options. The gold options are more suited for experienced investors as they are complex instruments with risk.
The main advantage of investing in gold is having a high liquidity on your investment.
This means that, in case of an emergency, you can easily and swiftly convert your investment to cash. Also, in the long term, gold steadily increases in value. This is why gold is considered to be a safe-haven by many investors.
The only disadvantage of investing in gold is the lower returns over a short period of time.
Choosing the right option depends on your expectations, the time for which you want to invest and your risk tolerance.
For example, bonds can be risky. But they also offer higher amounts of returns in shorter periods of time. If you just want to prevent your savings from depreciating in value over time, investing in gold can be an option that you can consider.
- Long Term Investments
Long-term investments are more aimed at increasing your wealth over longer than 2 years but they may come with higher risk depending on the instrument class.
Long term investors usually aim for higher returns and consequently, the risk involved is also greater. These need proper planning and in-depth knowledge about the markets and financial institutions.
The main types of long-term investments are:
Stocks represent partial ownership of a company. Stockholders don’t always have a say in the affairs of the company, but they are entitled to a proportion of the company’s profits based on the amount they have invested.
Stocks can either grow in value or you can get periodic dividend payouts. Some investors invest for growth in value and some look for high dividends.
Based on how you will benefit, stocks are of 2 types:
- Growth Stocks-
Companies issuing growth stocks focus more on growing by re-investing their earnings to accelerate business expansion, than paying dividends to the investors. This is why growth stocks often have negligible dividend payouts.
- High Dividend Paying Stocks-
In this case, the company spends a significant proportion of its profits in paying dividends to its stockholders. The dividend payouts are often greater in value than the payouts from fixed-income securities.
Stocks can be invested from JSE licensed brokers.
- Long-term Bonds
Bonds are a type of fixed-income securities. Long-term bonds usually refer to those bonds that have a term of at least 10 years.
Long-term bonds have greater interest rates than short-term bonds. But the risk involved is greater too.
One of the risks involved in long-term bonds is that interest rates on similar securities may rise during the term. This means you’ll be stuck with an undervalued investment.
Or your investment might fail if the company or asset in which Bond is investing fails.
- Mutual Funds & Unit Trusts
Mutual funds and unit trusts are investments made in a wide variety of stocks that differ in the amount of risk involved and return potential. Both are managed by financial experts called fund managers.
Because of their diversification, mutual funds and unit trusts can maintain a desired level of returns, while minimizing the amount of risk involved.
The only concern here is to find a good manager who has a good track record and whose goals align with yours.
Despite the good track record, there is still a huge market risk and no guaranteed returns can be ensured in case of uncertain markets.
- Exchange-Traded Funds (ETFs)
ETFs is a collection of securities like stocks, bonds and/or commodities that are traded on an exchange. They are traded through a JSE broker. All these may sound similar to mutual funds, but the difference lies in liquidity, costs involved and management styles.
Investing in ETFs carry similar risks of market crashes and fluctuations in the value of assets.
- Real Estate
The most common way of investing in real estate is by buying a house. You can buy a house on a low down payment as a loan. You can then rent it or use it for your own purpose.
You can also invest in Real Estate Investment Trusts (REITs) at JSE. REITs work in the same way as stocks. You get partial ownership of a property and the value of your investment increases as the property increases in value.
Like short-term investments, long-term investments also come with different levels of risks involved and capital appreciation.
However, unlike short-term investments, it is better to diversify your portfolio when going for long-term investments. This will minimize the amount of risk involved while ensuring you get the desired level of returns.
Short term investments are mostly for people looking for savings with short term returns with low risk. While long-term investing is for consolidating & building a portfolio for future returns and if done properly can help meet life goals.
- Speculative Instrument Investments
These involve a very high level of risk and require a better understanding of the markets.
These forms of investments aren’t suitable for beginners and most types of investors. You need to have clear understanding of these instruments and market. These can’t be classified as investments in traditional sense as they are speculative instruments.
The returns on such investments is usually higher than other forms of investments, but so are the associated risks.
Here are the types of speculative instruments:
- Derivatives- Future, Options and CFDs
Derivatives are contracts signed by two parties based on the value of an underlying asset. The asset is then traded at a predetermined price on a later date. In such contracts, the benefit of one party (due to fluctuations in the market) comes at the loss of the other.
The contracts can be based on assets such as shares, commodities, bonds and currencies. The basic types of derivatives are futures, forwards, options and swaps.
Derivatives require the traders to predict the price movements of an asset based on various factors (like economic, demand & supply).
Other complex forms of derivatives include CFDs or Contract For Differences. CFD is an agreement between an investor and a broker to exchange the difference in the value of an asset between the opening and closing of the trade.
- Forex Trading
The foreign exchange (forex) market is a market where global currencies are traded in pairs – like the USD/ZAR (US Dollar/Rand).
Forex traders speculate on political, economic and various other factors that might affect currency’s value. Volatility in forex enables traders to make profit.
Forex trading is very risky and requires sound knowledge about how the different events will affect the value of a currency.
FX Traders can trade forex through regulated forex brokers in South Africa that offer CFD trading.
Bitcoin is the world’s most popular cryptocurrency. It is a digital currency not backed by Government but in recent years it has increased in popularity and acceptance among investors, speculators and businesses.
Bitcoins, being a digital asset, can be hacked. Apart from this, the value of bitcoins is also subject to market fluctuations.
Speculative instruments are highly risky investments and only experienced traders should go for them. Beginners who don’t have knowledge about these instruments should not invest in them without licensed expert’s advice or guidance.
It is advised to start investing in speculative instruments in small amounts at first. This will ensure you get a hang of the trading procedures. You will also get enough time to decide if the form of investment is suitable for you.
Things to remember before you Start Investing
- Set your goals and budget according to your needs. Make sure that your goals aren’t unrealistic and you’re comfortable with the risks involved.
- Setting your goal also involves deciding on the term of the investment. The longer you want to invest for, the more carefully you have to plan.
- You shouldn’t invest all of your saved-up money. This will leave you vulnerable to any unforeseen financially-demanding events.
- Educate yourself about the markets. This also makes sure that you know what you are signing up for. Consult a licensed financial expert if needed.
- Try to diversify your investments to reduce the overall risk profile of your portfolio.
- Emotions should be kept at bay while investing. Holding on to a decaying asset and impulsively investing in an emerging one are two of the most common mistakes.
- Lastly, always invest via a regulated or licensed broker. Only the FSRA (Financial Sector Regulation Act, 2017) approved financial institutions, brokers licensed by the FSCA (Financial Sector Conduct Authority) and JSE (Johannesburg Stock Exchange) brokers can be considered safe.