How can I get access to the markets?

Key takeaways

  • Before you decide how to invest give some thought to:
    • Whether there is an investment product that suits your needs.
    • Whether you may need to access the investment earlier than planned.
    • Whether you want advice or will do-it-yourself.
    • The costs and any taxes you will pay.

Your first steps to long-term investing should be to work out your investment goal, the return you need and the investment risk – or the appropriate exposure to asset classes that grow  - you need to get that return.

Then you can focus on how to get there – the investment products you need and the terms and costs that come with them.

Do I need an investment product?

You can invest directly in share markets like the JSE, and, if you have large amounts to invest, in the bond and money markets.

However, investment products, such as unit trust funds or exchange traded funds, can offer you more affordable access and help you diversify across a number of shares or bonds or even across asset classes. Read more: What is a unit trust fund? and What is exchange traded fund?

For example, equity unit trust funds and many exchange traded funds offer you a way to invest in a range of shares, while multi-asset unit trust and exchange traded funds (ETFs) allow you to invest in shares, bonds, listed property and cash in a single fund. These funds make diversification affordable as you can invest smaller amounts. They will give you the benefit of an investment selection made by a professional fund manager, or exposure to an index tracking the whole or a sector of its market.

Unit trust funds and ETFs are also available as underlying investments in other financial products that have tax saving or estate planning benefits. These products include a tax-free savings account, a retirement fund and an endowment.

These products may have contractual terms or restrict access to your investments for certain periods.

Read more: What do I need to know about investing in a tax-free savings account?
What is a retirement fund?

Do you need to access your money?

Before you invest, think about whether you may need access to your money during the term of the investment.

When you need immediate access to your money, you should choose an investment with little to no volatility, like a money market fund.

In these investments, however, you will either not earn much above inflation or not even beat inflation after tax.

While investments, such as unit trusts and exchange traded funds, can be accessed quickly, they may be subject to higher volatility and it may not always be wise to access them soon after investing.

When investments are exposed to markets with higher volatility, you need time to realise a good return. If you need to access your money on short notice, it may be at a time when your investment is not doing well. Over longer periods, however, you are more likely to have achieved good average returns and recovered your costs, even if you access your money during a market low.  

Some investment products, such as an endowment, have investment terms of at least five years, and offer only limited access to your money during this term.

Products, such as a retirement annuity, offer the benefit of a tax deduction for amounts you contribute, but come with restrictions on access to your money before the age of 55.

How do you want to invest?

Before you start looking for an investment, give some thought to how you want to invest. Do you want to make your own decisions about where to invest and to carry out the transactions yourself, or do you want the help of a financial adviser?  If you want help, do you want to speak to a human or use a robo-adviser? A robo-adviser is an online website using an algorithm to guide you through a range of investment choices. Read more: What is a robo-adviser?

Making and managing your own investments requires a lot of initial research, as well as continual monitoring to ensure the investments perform as you expect. If you are managing your own allocations to different asset classes, you may need to ensure that allocation is maintained by adjusting your exposure when one asset class performs better than another. Or, if you are diversifying across a range of shares by investing equal amounts in each, and one does better than another, you will need to adjust your allocation to maintain your diversification. This is known as rebalancing.

If you want to invest directly in shares or exchange traded funds, you will need to use a stockbroker or an online share trading platform.

If you want to invest in a number of different unit trust funds or exchange traded funds, you can use an investment platform or linked investment services provider. An investment platform allows you to invest in multiple funds through a single provider and to switch between funds cost-effectively. Read more: What is an investment platform?

A financial adviser can help you think through all these questions, analyse your investment needs and the investment risk you can afford, and are comfortable, taking.  An adviser can then help you identify suitable investments and get invested. Advisers often outsource the construction of suitable investment portfolios to discretionary investment fund managers.

Your adviser should then monitor your investments to ensure they are performing in line with the returns you need and that they are rebalanced when necessary.

The costs of investing

No investments are free. Every provider incurs costs offering you an investment. If the provider says the product is free, the costs are being recovered in some way from the returns you are offered.

You need to weigh the costs you will pay against the returns you could earn and the likelihood of achieving those returns. A high-cost investment may offer the potential to earn higher returns than a lower cost one, but the costs are certain, while the returns may not be.

All the costs should be disclosed to you and you should understand the long-term implications of those costs. Read more: What fees will I pay on my unit trust investment? and What are the costs of investing in ETFs?

The tax you will pay 

Different investments incur different taxes, including:

  • Income tax

Investments, such as money market and bond unit trust funds, earn interest.  This interest will attract income tax if it exceeds the annual interest exemption. You may earn up to R23 800 in interest income tax free each year. If you are over the age of 65, you can earn R34 500 each year. 

This limit applies to the interest you earn from all your investments and not to each investment. So, if you have a bank account and a money market account, the interest from both will be added together and then the limit applied.

The interest on which you must pay tax will be added to your taxable income and you will be taxed at your marginal tax rate. Read more: How do the income tax brackets work and what is my marginal tax rate?

  • Dividends tax

Investments such as shares, ETFs or equity unit trust funds earn dividends which are taxable. Dividends tax is applied at 20% of the dividends paid to you. On South African investments, dividends tax is withheld by the company paying the dividend and paid on your behalf to the South African Revenue Service.  

  • Capital gains tax

Capital gains tax (CGT) is payable on investments, such as shares, unit trust funds, exchange traded funds and hedge funds, that make capital gains.

This tax is only payable when you sell the investment or withdraw from it. You, or your estate, will also be liable for CGT if you emigrate or die.

The capital gain is calculated by subtracting the cost of acquiring the asset from the proceeds of selling it.

Every year you are entitled to a capital gains tax exemption of R40 000. Your estate will be entitled to an exemption of R300 000 in the tax year in which you die.

After applying the exemption, 40% of the gain is added to your taxable income for the tax year in which you realised the gain.