18 Mar 2015 Investing in Tax Free Savings Accounts (TFSA) – what’s the fuss?
Everybody’s talking about it at the moment: Tax Free Savings Accounts, or TFSAs. Why should you be looking at this and how does it work?
It is imperative that every citizen makes use of this opportunity. The savings over the long term will be substantial. If possible you should open an account for every family member.
You should study all the available products, but we favour ETFs because of their low cost structures. Unlike a Unit Trust, where you pay for researchers and portfolio managers, ETFs do not have research. They track an index of shares as closely as possible. It is also a fact that very few Unit Trusts outperform the Indices consistently. Investing in an Index tracking ETF makes a lot of sense.
Which ETFs then? We have looked at all the ETFs in the Satrix stable, Satrix started ETFs in South Africa. In our opinion we will split the R30,000 annual contribution between the Satrix Divi Plus Fund (Divi Fund) and the Satrix MSCI World Equity Index Feeder Fund (World Fund). This must not be construed as advice or solicitation to invest, this is just our opinion.
The World Fund MSCI tracks the Morgan Stanley World (Developed Markets) Index, in South African Rand. Developed markets like the US have performed very well and are likely to continue to do so. This investment also gives you some protection against Rand weakness. The World Fund returned 16% for the year to end February, with dividends reinvested, compared to 12,5% for the local Top 40 Index. Their biggest holdings are: Apple Computer; Exxon Mobil; Microsoft; Johnson & Johnson; Wells Fargo and Procter & Gamble.
The Divi Fund invests in the FTSE/JSE Dividend Plus index. The shares are selected by reason of their ability to pay high dividends consistently. These are top quality shares that outperformed the Top 40 Index and should also decline less in a falling market. The Divi Fund returned 23% over the 12 months to February compared to the Top 40 Index’s 12,5%, again with dividends reinvested. The biggest investment is in financial shares:
Those that want to take more risk can replace the Divi Fund with the Satrix Swix, Satrix Rafi or the Satrix Top 40.
We are getting a lot of queries about TFSA. Sanlam iTrade will not offer these accounts for direct equity investments yet as the costs involved are a bit high for a R30,000 investment compared to other products available. From year two we will start to offer them for direct equity investments.