Life Begins At...

The Retiree Magazine Summer 2011-12

Life Begins At.....

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Page 55 of 171

FINANCIAL MATTERS Investing directly versus managed funds Is it better for an investor to invest directly via the market or indirectly via a fund manager? The answer will depend on each investor's personal investment requirements. Terri Loy reports. The benefi ts of investing directly Investors can generally invest directly in any of the following listed security types. • Ordinary Shares • Preference Shares • Contributing or Partly Paid Shares • Convertible Notes • Debentures • Listed Property Trusts • Company Options • Instalment Warrants • Listed Investment Companies (LICs) • Exchange Traded Funds (ETFs) Advice from a qualifi ed adviser should be sought to determine which security type is appropriate as each carries different levels of risk. Why are shares so popular? • Shares have historically outperformed all other assets classes over the long term. • Shares can provide long-term capital growth, which can offset the effects of infl ation. • Shares can provide a strong and growing income stream. • Fully franked shares offer tax benefi ts for many investors. • Dividend re-investment plans can multiply the capital growth effect of a share investment. Imputation Credits Many share dividends paid to shareholders include 'Imputation 50 THE RETIREE SUMMER Credits'. So that they are not taxed twice – once at the company tax rate and again at their marginal income tax rate – shareholders are entitled to an imputation (franking) credit, which means they pay less tax on their dividend income. If the shareholder's imputation credits are greater than the amount of personal tax payable, any surplus imputation credits are refunded to the shareholder. Some shareholders may need to hold shares for at least 45 days to qualify for imputation credits. Tax issues By investing directly into listed securities it is the investor who controls the tax consequences of that investment. That is, investments are bought and sold at the investor's discretion rather than at the discretion of a fund manager. Capital gains and losses can be managed to suit the investor's tax position. Fees Investing directly generally involves one upfront cost – that is, the brokerage cost to buy or sell the investment (unless the listed security is a warrant, LIC or ETF, for example). Access One of the key advantages of investing directly is the fl exibility and liquidity sharemarkets provides. The Australian Stock Exchange (ASX) provides an environment for Australian investors to easily buy or sell listed securities in a timely manner. The benefi ts of investing in managed funds A managed investment pools an individual investor's money with the money of thousands of other investors to form an investment fund. Investment managers then invest the pooled money on investor's behalf. This means exposure to more investments than what the individual may generally be able to afford if they invested the same amount of money directly. The benefi ts of investing in managed funds include: • Trained investment specialists - who constantly research and monitor investment markets to determine the best possible investment opportunities. • Convenient and effi cient - paperwork and administration, regular information on the fund's performance, annual tax statements and tax guides. • Diversifi cation - a diversifi ed portfolio is easy to achieve via a managed fund. Most managed funds are structured as unit trusts. When invested into the fund, the investor's money buys units in that fund. The unit price refl ects the value of the fund's investments. If the value of the fund's investments rises, the unit price rises. If the value of the fund's investments falls, the unit price falls. Tax issues Fund managers may turn over stocks within their investment portfolios (particularly Australian Equity funds) on a regular basis. Distributions from managed funds can include realised and unrealised capital gains or losses as a result, and is displayed as 'total return'. Unfortunately, this usually means the investor has no control over the tax

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