Why you need Discretionary Investments

Dis­cre­tionary invest­ments offer flex­i­bil­i­ty, con­trol, and diverse oppor­tu­ni­ties for both indi­vid­ual and insti­tu­tion­al investors, mak­ing them a vital imple­ment for finan­cial growth. In an ever-chang­ing South African invest­ment land­scape, much you can find when you know how dis­cre­tionary invest­ments work: far greater cus­tomiza­tion of your port­fo­lio and the adapt­abil­i­ty in accor­dance with con­di­tions in the mar­kets. Here in this arti­cle, we shall unpack the many parts of dis­cre­tionary invest­ments to answer the ques­tion why it forms such a cru­cial com­po­nent in a win­ning invest­ment strat­e­gy for South Africa. 

Part 1: What Are Discretionary Investments?

Dis­cre­tionary invest­ments are not manda­to­ry invest­ment prod­ucts that allow the investor to decide how his funds could be placed in var­i­ous invest­ment vehi­cles, based on the risk appetite and oth­er finan­cial goals. The fol­low­ing are unlike any oth­er oblig­a­tory invest­ment prod­ucts like RAs and pen­sion funds in that they will give an investor con­trol over how their mon­ey will be put into invest­ments, as well as which invest­ments those would be, and when it could be with­drawn. Some dis­cre­tionary invest­ment types include: Unit trust shares; TFSAs; and over­seas invest­ments. 

Types of Discretionary Investments

This ensures quick response to trends in the mar­ket through dis­cre­tionary invest­ment com­pared to oth­er retire­ment prod­ucts since they are rigid­ly ruled or manda­to­ri­ly select­ed.

Part 2: Why Choose Discretionary Investments?

There are var­i­ous rea­sons why dis­cre­tionary invest­ments should be in the port­fo­lio of a South African investor. From dis­cre­tionary invest­ments comes the oppor­tu­ni­ty of greater returns to the investor and even much more tax advan­tage than before. The invest­ment option is also larg­er.

Flexibility and Control

Dis­cre­tionary invest­ments allow a per­son to exer­cise dis­cre­tion over his port­fo­lio based on the goals. For instance, if the investor of South Africa believes that the rand is going to depre­ci­ate, then he can instant­ly trans­fer one per­cent of his off­shore. Such abil­i­ty allows him or her to respond at light speed and grasp at the swings of the mar­kets, which offer tremen­dous strate­gic advan­tage.

Tax Efficiency

Invest­ments are dis­cre­tionary as TFSAs grow tax-free. Hence, such an invest­ment would attract any investor whose goal is to max­i­mize their return on invest­ment. Unit trusts and share port­fo­lios have tax­es paid on div­i­dends and cap­i­tal gains. How­ev­er, with time, their struc­tures can min­i­mize the tax bur­dens. Tax-free invest­ments are high­ly attrac­tive in South Africa because all the income one derives from inter­est, div­i­dends, and cap­i­tal gains is retained by the investor.

Part 3: Types of Discretionary Investments in South Africa

There are many types of dis­cre­tionary invest­ments found in South Africa, and each has its fea­tures that attract in dif­fer­ent ways based on the style of invest­ment and objec­tive. That is why know­ing the types of these invest­ment vehi­cles would be high­ly valu­able for the investors who desire to make their deci­sions and diver­si­fied port­fo­lios.

Unit Trusts

A unit trust is among the com­mon dis­cre­tionary invest­ments in use in South Africa. They com­bined cap­i­tal from dif­fer­ent indi­vid­u­als to invest in any num­ber of oppor­tu­ni­ties; an investor gets a diver­si­fied bas­ket of invest­ments in one shot. Unit trusts allow you to invest in bonds, equi­ties, prop­er­ty, and oth­er asset class­es, which help spread risk.

Shares

A share is a direct invest­ment in any enti­ty that is trad­ed on the JSE. Shares rep­re­sent a poten­tial to gain high returns but risk loss of cap­i­tal too. South Africans can diver­si­fy their port­fo­lios as they can make selec­tions of var­i­ous shares from numer­ous sec­tors.

TFSAs

Tax-free sav­ings accounts are appro­pri­ate for peo­ple who are inter­est­ed in sav­ing more while at the same time ensur­ing that the tax­es lia­bil­i­ties are kept at min­i­mum. In South Africa, one is allowed to save up to R36 000 per year with the pos­si­bil­i­ty of dou­bling the amount in one life­time — R500 000. The mon­ey saved in a TFSA grows free of tax. They thus appeal to more peo­ple, main­ly towards long-term sav­ings.

Offshore investments

Off­shore invest­ment is a very good diver­si­fi­ca­tion from the South African mar­ket. Off­shore invest­ments help the South African investor express his inter­est in inter­na­tion­al mar­kets and show­case pos­si­ble returns from oth­er cycles of the econ­o­my. One can invest direct­ly in for­eign stocks or bonds or through off­shore unit trusts.

Part 4: Tax Implications of Discretionary Investments

South African investors must con­cen­trate on the tax impli­ca­tions of dis­cre­tionary invest­ment. The deep study of all such tax impli­ca­tions would help derive greater returns and also lead to tax effi­cien­cy.

Capital Gains Tax (CGT)

The cap­i­tal gains tax is also borne by the investor through dis­cre­tionary prod­ucts, being a shares or unit trust. How­ev­er, every tax­pay­er has an annu­al exclu­sion of R40,000 in cap­i­tal gains. There­fore, when the thresh­old has been exceed­ed, there is a cap­i­tal gain tax, hence mak­ing it 18% for indi­vid­u­als.

Interest and Dividends Tax

Dis­cre­tionary invest­ments earn income on the account. Div­i­dends how­ev­er are taxed at a 20% with­hold­ing tax. How­ev­er, TFSAs allow inter­est, div­i­dends and cap­i­tal gains to accu­mu­late tax-free, mak­ing them espe­cial­ly attrac­tive for investors who will want to min­i­mize the tax lia­bil­i­ties made on their invest­ments. 

Under­stand­ing all tax rules allows an investor to make the appro­pri­ate choice of invest­ment in har­mo­ny with his tax sit­u­a­tion.

Part 5: Strategic Asset Allocation in Discretionary Investments

The choice of invest­ment in actu­al assets remains per­haps the sin­gle biggest deci­sion an investor will ever make. In dis­cre­tionary invest­ing it is a deci­sion of how or in what fash­ion funds are to be invest­ed across equi­ties, fixed income, and prop­er­ty.

Diversification

Anoth­er key advan­tage of dis­cre­tionary invest­ments is diver­si­fi­ca­tion in a port­fo­lio. Diver­si­fi­ca­tion low­ers the risks since it does not depend high­ly on one form of assets. One can invest in the South African local and inter­na­tion­al mar­kets to make sure their safe­ty if there hap­pens to be any sort of fall­out in the local econ­o­my.

Risk Tolerance and Time Horizon

There­fore, based on your invest­ment hori­zon and your abil­i­ty to han­dle risk, your pro­por­tions of invest­ment types should be fixed. When you are at a younger age and still capa­ble of tol­er­at­ing risks, you might invest more in equi­ties. A short time before retire­ment, you could go for low-risk invest­ments, say bonds or prop­er­ty. 

A bal­ance of the risk involved with the poten­tial returns thus comes with diver­si­fi­ca­tion.

Part 6: How to Choose the Right Discretionary Investment

The iden­ti­fi­ca­tion of the right dis­cre­tionary invest­ment would be informed by finan­cial goals, capac­i­ty to under­take risks and time hori­zon the investor was will­ing to under­take. Here’s how you can begin:

Assess Your Financial Goals

Are you sav­ing for retire­ment, a home, or edu­ca­tion? Your goals will dic­tate your invest­ment strat­e­gy. Long-term goals may war­rant high­er-risk invest­ments, while short-term goals require more con­ser­v­a­tive options.

Evaluate Risk Tolerance

If you can afford risk, you can opt for more volatile assets such as equi­ties. If you want sta­ble returns, you can opt for bonds or unit trusts with low­er volatil­i­ty.

Consider Costs and Fees

Dis­cre­tionary invest­ments usu­al­ly come with man­age­ment fees. You should con­sid­er these cost in your deci­sion mak­ing process Orga­ni­za­tions should con­sid­er these costs into their deci­sion mak­ing process. Dis­cre­tionary port­fo­lio man­agers can there­fore assist you in deter­min­ing the right approach to your invest­ment.

Conclusion

Dis­cre­tionary invest­ments are one of the most basic when it comes to invest­ment options for any South African investor espe­cial­ly when they want to have the abil­i­ty to con­trol their invest­ment, enjoy tax advan­tages and diver­si­fy its port­fo­lio. The more devel­oped the South African econ­o­my, the more promi­nent dis­cre­tionary invest­ments will be, becom­ing an inte­gral part of either per­son­al invest­ment and, of course, options for insti­tu­tion­al investors. Ready to take con­trol of your finan­cial future with dis­cre­tionary invest­ments? Explore our com­pre­hen­sive guide to max­i­miz­ing your port­fo­lio and achiev­ing your finan­cial goals today!