How to make your money work for you

In the current low-yield environment, finding reliable income-generating investments can be challenging. However, by diversifying your portfolio, using tax-efficient strategies, and making informed decisions, you can optimise your returns while managing risk.

Follow these 14 rules to ensure your funds are optimally invested:

1. Use the Risk-Free rate as a guide

“The risk-free rate is typically the yield on government bonds for the comparable period. Once you establish the risk-free rate, it becomes easier to assess whether additional yield is worth the extra risk. If an investment’s risk is disproportionately high compared to its expected return, avoid it,” advises Sean Segar of Nedgroup Investments.

John Field, CEO of FedGroup, adds: “Achieving the right balance of income and growth is crucial. There is no such thing as a risk-free investment, but the risk must align with your financial circumstances. Always assess the reputation of the product provider and ensure the company is regulated before investing.”

2. Diversify your investments

Diversification is key to reducing risk and maximising returns. South African investors have access to a variety of asset classes, including equities, bonds, real estate, and commodities. Investing across these sectors can help protect your portfolio from volatility in any single area.

3. Understand what you are investing in

When investing in an interest-bearing instrument or unit trust portfolio, Segar recommends taking the following steps:

• Determine whether the quoted rate is effective or nominal and whether it is net or gross of fees.

• Ensure costs are reasonable. Income-type funds are generally cheaper than equity and balanced funds.

• Review the investment mandate to check if it allows investments in areas you are uncomfortable with, such as property, preference shares, offshore assets, or high-yield bonds.

• Avoid investment fads and look beyond marketing messages.

• Understand the regulatory framework governing the product and the issuer.

4. Make use of pooled income funds

Pooled investment funds offer several advantages, says Segar. These include spreading counterparty credit risk, the ability to invest in longer-term instruments with higher yields while still maintaining liquidity, lower minimum investment amounts, and regulated fee structures.

5. Make use of Tax-Advantaged accounts

South Africa offers tax-advantaged investment vehicles such as retirement annuities (RAs) and tax-free savings accounts (TFSAs). Utilising these can enhance your investment growth potential by minimising tax liabilities.

6. Ensure liquidity when needed

If you do not have other investments to draw on in an emergency, avoid locking your funds away, even if the yield is attractive. “It may be tempting to fix investments for a set term to earn higher yields, but should you need to access these funds unexpectedly, penalties may apply,” warns Segar.

7. Match income payment dates to your Needs

Some investments pay out income only every six months or at the end of the investment term, which may not suit your needs.

“Ensure that the frequency of income distributions aligns with your requirements. Withdrawing funds before the payout date can lead to unnecessary administration or penalties. Conversely, if an investment pays out more frequently than needed, reinvesting income can enhance returns through compounding,” advises Segar.

8. Avoid leaving cash on One-Day call unless necessary

Do not sacrifice potential yield for immediate access to funds if you do not need them. “The yield on daily call accounts is lower than that of term deposits. Put excess cash to work until it is required,” says Segar.

9. Do not be overly conservative

“Most people can afford to take on a certain level of risk, which can be rewarded with higher returns. Understand your risk tolerance and apply it appropriately,” says Segar.

10. Consider the implications of tax

Interest and capital gains are taxable. “However, there are annual exemptions available to individual taxpayers. Use these allowances before investing in tax-structured products. Retirement annuities and preservation funds shield gains from taxation within these structures,” explains Segar.

11. Remember the power of compounding

“The length of time funds are invested and the interest rate achieved drive growth. To maximise compounding, reinvest distributions where possible,” says Segar.

12. Account for Inflation

Inflation erodes the real value of investments. “If yields are lower than inflation, real returns are negative, and investors effectively lose purchasing power. Do not stay in low-yielding income investments for too long, as this can lead to wealth erosion,” warns Segar.

13. Seek professional advice

The saying ‘if it sounds too good to be true, it probably is’ should always be applied when evaluating financial products. Many investors have lost money to schemes that were nothing more than scams.

Field recommends consulting a professional financial advisor. “Some people believe financial consultants are expensive, but they cost far less than losing your capital or income,” he says.

14. Avoid putting all your eggs in one basket

Field advises investors to spread their investments across multiple sectors. “If you invest in shares, do not rely on just one company. Ask your broker to allocate funds across four to five companies with a strong history of paying dividends. Diversify across multiple sectors to mitigate risk. While markets can decline, they tend to recover over time,” he explains.

Optimising your investments in South Africa requires a combination of diversification, informed decision-making, and disciplined financial planning. By understanding the local investment landscape and leveraging available financial tools, you can create a solid foundation for long-term financial security and growth.