Oran Hall | Saving through investment has risks

QUESTION: I need some help. I want to save $5,000 per month but not sure which institution to do it with. I want some sort of investment involved. Any suggestions?

- Lissa

FINANCIAL ADVISER: There is more than a subtle difference between saving and investing and I would suggest that you need to know the type of financial instrument you prefer before identifying a financial institution with which to do business.

In any case, your decision to save and invest is very positive and I am encouraging you to stick to whatever programme you put in place.

Saving suggests putting aside money in a financial instrument to which the saver has easy access and which promises the certainty of receiving the principal sum at some time in the future, and a return such as interest. A certificate of deposit is an example of a savings instrument.

Investing is also putting money into a financial instrument or asset but with the prospect of the principal sum increasing although there is also the chance that the value of the principal may decline. Additionally, there is usually the element of receiving a return in the form of income such as dividends. Bonds and ordinary stock are examples of investment instruments.

It seems to me, then, that you are interested in both income with security of principal and capital appreciation. In most cases, a sum of five thousand dollars would be a small sum to invest, but there are opportunities to invest such sums and it is even possible to get some income as well.

The instrument that best comes to mind is the unit trust. Some require larger sums but other unit trusts do facilitate investors with the sum you have in mind.

The unit trusts have many different types of funds to meet several objectives. The capital growth unit trust funds, as the name suggests, are geared to the growth of capital. They invest in real estate and ordinary shares mostly but also in bonds to a lesser extent to cushion any fall off in the prices of the other investments.

Price fluctuation

Money market funds invest in short-term interest-earning securities. Their prices increase because the interest they earn is reinvested so unit prices do not fluctuate as happens in the case of capital growth funds, the prices of which tend to rise and fall with fluctuations in the prices of the securities which make up the portfolio.

Some unit trust funds invest primarily in bonds and earn interest which is added to the value of the fund but unit prices may fall if interest rates increase and cause the prices of bonds to fall due to the inverse relationship between the prices of fixed rate bonds and interest rates, meaning that they move in opposite directions.

Although funds that invest in interest-bearing securities tend to reinvest the interest they earn, a few do distribute some of the interest income, which tends to put a check on the upward movement of their prices. These are described as distribution funds and the distribution made is taxable.

Unit trusts do not generally put restrictions on when investors buy units or surrender them and, in some cases, it is possible to put arrangements in place to have funds remitted to the unit trusts to buy units without the investor physically going to the unit trust to do so.

This form of investment allows small investors to participate in investments that would normally require big money. For example, a small investor can buy units in a fund that invests in real estate. Additionally, all investors buy units at the same price, meaning that the investor who buys 100 units pays the same unit price as the investor who buys 100,000 units in that fund at that time.

You can find a report on the unit prices and performance of the unit trusts each week in the Financial Gleaner. Here is a list of the unit trusts: Barita Unit Trust, Scotia Asset Management (Jamaica) Limited., JMMB Fund Managers Limited, Sagicor Investments (Sigma Funds), NCB Capital Markets Limited (NCB CAPFunds), VM Wealth Management Unit Trust, Proven Fund Managers and JN Mutual Funds. Mutual funds are very similar to unit trusts.

Overall, the fund managers offer 57 products. It can be quite daunting making a selection but it becomes easier when you are clear about your financial objectives.

One approach you could take is to invest in capital growth units one month and in money market units the other month; or invest equal amounts in each type of fund each month if you identify a unit trust that facilitates that level of investments. The money market fund should give you a better return than the savings instruments in the market.

- Oran A. Hall, the principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. finviser.jm@gmail.com