If you’re just starting out, you are probably wondering how to select the right shares. There are so many options available. It can be overwhelming.
Collective investment schemes (CIS) take the guesswork out of investing. Collective investment schemes are made up of shares in different companies, property shares, bonds and cash. As an investor, you buy a slice of the product, which is called a unit or a share.
When you buy a unit or a share in a collective investment scheme, you are actually buying all the different ingredients that make up that product.
There are different types of collective investment schemes, but we like unit trusts and exchange traded funds (ETFs).
Different types of assets can be put into a special kind of account, called a trust. Unlike normal bank accounts, trust accounts are managed by a designated person or company, called a trustee. A lot of the time, more than one person benefits from trust. A person benefiting from a trust is called a beneficiary.
A unit trust is a type of collective investment scheme. The account has the type of assets ordinary people would like to invest in. For example, a trust can be made up of shares in different companies, shares in property companies and some bonds. It can even have some cash in the bank. The trustee decides which companies to invest in and how much of each type of asset should be in the trust. The trust then buys all of those assets and stores them in the account.
You can become a beneficiary of the trust by buying one or more slices of the trust. In this case, the slices are called units. Just like buying a slice of cake actually gets you some egg, flour, milk and baking powder, buying a unit in a unit trust gets you some of all the shares, property, bonds and cash held by the trust. You can choose a unit trust that holds the type of assets that you prefer.
Indices and ETFs
An index is a way of tracking the performance of a group of companies on an exchange. It’s normally a graph representing the share price of a particular group of companies. The graph goes up or down based on the average share price moves of these companies.
In South Africa, the most popular index is the Top 40 index. This index tracks the 40 biggest companies on the JSE.
An exchange traded fund (ETF) is a type of product that buys shares in all of the companies in an index. If an index tracks five car companies, a company can make a product by buying shares in each of those five companies and then selling slices of that product to the public.
When the five companies do well, the index goes up and the ETF does well. If the car industry struggles and the companies don’t make money, index goes down and so does the ETF.
These three posts are a good place to start finding out more about ETFs that are available on the South African market:
Who makes ETFs?
Banks and other financial institutions make ETFs. The ETF products then lists on the exchange, just like a company. Investors like us can buy shares in the ETF just like they would buy shares in individual companies.
You can find more information about investing on this page
As of 2021, each South African resident is entitled to invest R36,000 per year into a tax-free account, with a lifetime limit of R500,000. This allocation is available to everyone, including children and foreign nationals. This money, invested into a special tax-free savings account, is exempt from three kinds of tax: dividend withholding tax, tax on interest and capital gains tax (CGT).
While you can save cash in a tax-free account, you will miss out on significant tax savings. To get the full benefit of tax-free investing, you should invest in an Exchange Traded Fund (ETF). We explain why this will give you the maximum benefit in this post.
Simon Brown does a JSE Power Hour presentation every year on the most recent developments in tax-free investing with ETFs. Below is his February 2021 presentation.
You can download a list of the ETFs which qualify for Tax-Free investing here.
Learn exactly how tax-free investment accounts work and how to get yours in the video below.