Why Changing Funds May Not Be Wise

changing-fundsOur previous blog posts dealt with some of the practical implications of the 2012 Budget as far as South African investors are concerned. Having dealt with the issues of interest rate exemptions and changes in taxes on dividends and capital gains, We now move on to some practical advice for all South Africans who have equity investments: The fact that switching between funds is not normally a good investment strategy.

With CGT and dividend taxes on the rise, the chances of paying high tax on your capital gains when you switch funds grow greater each year. In addition, you may not be selling your unit trusts in the fund at the best time, with the returns you’ve amassed being minimised by taxes and brokerage fees each time you switch funds. At present and in the future, South Africans are better advised to invest in a stable managed fund with an excellent track record and keep their contributions steady. These funds have been shown to outperform the JSE index and inflation over time, using a buy-and-hold approach that aims to filter out underperforming stocks and accumulate stable shares that deliver value to shareholders.

The Advantages of Managed Funds

Successful managed funds aim to accumulate shares that will perform reliably over time, gaining value over the long term and retaining it as opposed to boom and bust shares that could make you a tidy sum but equally wipe out the value of your portfolio if you buy them at the wrong time.

Made famous by billionaire investor Warren Buffett, this approach to investment allows your capital to grow over several years or decades, ensuring that by the time you retire you’ll have a stable source of income and avoid paying brokerage fees and taxes unnecessarily along the way. As your shares gain in value over several decades, despite sometimes moving up and down during good and bad years, your returns will be compounded and your dividends should increase. The approach of a managed fund is to ‘get rich slowly and stay rich’, which is an ideal approach for investors looking forward to a comfortable retirement.

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