Defined contribution funds
In a defined contribution fund, you carry
the investment risk - the possibility of your money increasing
or decreasing from time to time because of the movements in the
stock market.
Defined benefit funds
Investment performance doesn’t directly
affect your retirement fund assets in a defined benefit fund.
This is because your employer must keep a promise to pay you a
certain amount when you retire. This amount is worked out
according to a formula, which takes factors such as years of
service into account. Your employer will invest fund assets to
create growth, but you don’t share the investment risk. If the
fund’s investments are negative, then the employer will have to
make up any shortfall when members leave or retire from the
fund.
The Asset classes where your money is invested
|
Type of investment |
Risk and growth |
Cash |
Cash investments are
when you put money in a bank and the bank
pays you interest. The interest you earn is
called a ‘return’ on your investment. You
can invest in cash when you need a secure
‘return’ and cannot run the risk of the
value of your investment decreasing.
|
Cash is generally seen as the safest type
of investment in the short term, because you
will always get out at least the same amount
you put in. However, in the long run you
will not be able to grow your cash
investment as much as other types of
investments may be able to grow.
|
Bonds |
With bonds you lend money to the
government, a parastatal or a large company
that agrees to pay you interest on the
amounts loaned. You also get your initial
investment amount back at the end of a
pre-determined period. Bonds are less risky
than shares, but more risky than cash. They
generally give better returns than cash over
a longer period.
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Bond values can change quickly because
their value depends on interest rates. Bond
values typically increase as interest rates
drop, and drop when interest rates go up.
Although it can be risky to invest in bonds,
they are usually a less risky investment
than shares.
|
Shares (equities) |
Shares (also known as equities) are where
you buy a share or part of a company. As a
shareholder, you share in the profits of the
company (dividends).
You can check the value of a share by
reading the prices quoted on the
Johannesburg Stock Exchange (JSE). These are
the prices at which the shares are bought
and sold, and are determined by the amount
people are prepared to pay or receive to
either buy or sell their shares on the open
market.
|
The value of shares (equities) can change
often and quickly, compared to other asset
classes and are seen as very risky. Shares
are likely to give you the best investment
returns over the long term. This means your
money will grow best if you invest in
shares, but you also run the greatest risk
of losing some or all of your original
investment.
|
Property |
Investing in property generally means
investing in industrial, retail or
commercial real estate, either as a direct
ownership or through a listed property
company. You’ll get returns from rental
income and also from changes in the value of
the property through capital gain or loss.
|
Investing in property should not be
confused with buying a house or other
private property. In general, this type of
investment is for someone with a longer-term
investment horizon (at least five years),
who wants a relatively stable return from
year to year. Historically, investments in
South African property as a type of
investment have, over the long term, come
second only to South African shares.
|
Alternative investments |
Investments such as:
- Infrastructure (roads
and airports)
- Private equity
investments (investing directly in a
particular company)
- Hedge funds (reducing
risk by implementing strategies that are
often not dependent on the direction of the
market).
Returns come from income
on infrastructure investments and profits or
losses made by the company invested in.
|
Earns more than property, fixed interest
or cash in the long term.
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