Investors build up two pots of investments throughout their life. One is their retirement savings while the other is their discretionary savings. Retirement savings are usually managed in a retirement product by a professional investment manager. Discretionary savings is just that – you as the investor have discretion about how it should be invested. While some individuals prefer investing their discretionary savings directly in shares or property, other investors prefer to also leave this investment pot, or a portion of it, in the hands of professional investment managers. This is most often done by investing in Collective Investment Schemes (CISs), or as they are also referred to unit trusts or just simply funds.
These CISs are professionally managed funds that pool money from multiple investors, providing diversification and expert oversight. In the next two articles, we will summarise everything you as an investor need to consider when investing your discretionary funds with a CIS to ensure you make informed decisions that align with your individual financial objectives and risk tolerance.
Define your Investment Objectives
Before investing discretionary funds, clearly define your investment objectives. Having a clear understanding of what you want to achieve will help you find the most suitable product. Are you seeking capital growth, a regular income, or a combination of both? Understanding your goals will guide the selection of collective investment schemes that match your specific needs.
Risk Tolerance
Assess your risk tolerance honestly. Collective investment schemes offer different risk profiles, ranging from conservative to aggressive. Choose funds that align with your risk appetite, ensuring you can stay invested for the long term without making emotional decisions during market fluctuations.
Your investment time frame will also inform which level of risk is most suited for your investments. If you have a longer-term investment objective, it is recommended to choose a fund that has a more aggressive investment strategy as this will likely beat inflation over the longer term. On the flip side, if you are planning to invest the funds only for a few months, and need to withdraw the capital that will be used for a specific purpose, it might not be in your best interest to expose the funds to high levels of risk.
Asset Allocation and Diversification Benefits
Some collective investment schemes provide access to a diverse range of asset classes, such as equity, bonds, and real estate, reducing concentration risk. Diversification can enhance the performance stability of your portfolio by spreading investments across various sectors, industries, and geographies, meaning your risk exposure is lower. Be sure to seek out funds that are widely invested if diversification is an important consideration for your portfolio. The Minimum Disclosure Document (MDD) of the fund will usually show, in either a chart or table format, how the funds are invested.
If you however want to invest in a specific asset class, such as bonds for example, make sure to seek out CIS funds that only invest in your preferred asset class. Such funds will clearly be indicated on the MDD. You may want to invest in specific asset classes since it is an asset class you understand and feel comfortable investing in, or you may have conviction that such an asset class is positioned to deliver strong returns during your investment time frame. It may also be that your overall portfolio is under-exposed to this asset class, and you want to enhance your overall diversification.
Fund Performance and Track Record
Review the historical performance of the collective investment schemes under consideration. Although past performance is not a guarantee of future results, it provides valuable insights into the fund’s ability to meet its investment objectives over time.
When considering the fund’s performance, it is also important to compare it to its benchmark and with similar funds in the same ASISA (Association for Savings, and Investment South Africa) category, referred to as the peer group. It helps identify whether the fund is outperforming or underperforming on a consistent basis. Doing this also provides the investor with insights into how well the fund is achieving its investment objectives and are managing external market conditions and risks effectively.
When it comes to discretionary investments, investors often feel overwhelmed about what the right thing is for them to do with their hard-earned savings. Not only do they need to understand their own circumstances, goals and needs but they also need to identify the best investment strategy, asset class and product in an environment where there are many role-players and options available to them. CIS funds naturally become a popular choice for investors to use to invest their discretionary savings in considering that it is well regulated, liquid, managed by professionals and that there are a wide range of funds available to choose from.
This series of articles will help you as an investor to narrow down which CIS will best suit your needs and what are all the aspects you need to consider before investing.
