Retirement products (i.e. provident funds, retirement annuities and pension funds) provide you with different restrictions and benefits. Therefore it is essential that you understand how a particular retirement product works, in order to choose a product in line with your financial goals.
Retirement products are built around investments, which require time to grow. Even the best performing unit trusts can take a substantial period to produce returns. The returns you receive from a retirement annuity typically come from unit trusts. Unit trusts combine your money with that of other investors and then investment managers use the pooled money to purchase underlying assets. These assets can take the form of equities, cash, bonds, property and offshore investments. The type of asset depends on the objective of the unit trust.
Here’s a quick breakdown of each asset type to explain the importance of knowing what you have invested in. Some assets are more conservative than others, but it is unlikely that you’ll see inflation beating growth.
Equities are stocks (or shares) in a company. Shares are issued to raise money for the company and buying the shares give you partial ownership of the company. Equities typically outperform other asset classes over the long term, but can be quite volatile in the short term.
If you intend making a profit then invest in property. Usually unit trusts invest in property companies listed on the stock exchange. These companies derive all their income from owning and managing property.
You can think of bonds as IOUs with structured terms, which define the payment schedule and interest rates. An institution requests money and promises to pay it back according to the agreed upon terms.
Cash, in terms of investments, refers to short-term loans offered by institutions (i.e. governments, banks and certain large companies) at a slightly inflated interest rate than your typical bank account.
Strictly investing in one asset type for the entirety of your working life may see you losing out on growth. This is especially true if you’re invested in the more conservative classes. One asset class will deliver better returns than the others for certain periods of time. Local property, for example, has outperformed all the other asset classes for the past decade. Identifying the right time to move between assets, or switch between unit trusts investing in different asset types, can be difficult. Mistiming the move could prove costly. You may find yourself selling an asset class in the shallows and buying another as it is peaking.
Most investors find that leaving these decisions to an investment manager, who has more market experience and knowledge, is the best solution. Balanced funds are an easy way to manage your retirement savings since they comply with retirement fund regulations and invest in a range of assets. This eliminates the need to rebalance your assets to comply with regulations and a good investment manager can effectively diversify your risk.
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