QUESTION: I save every month and am interested in buying a car early next year. I plan to secure a loan to purchase it but, before doing so, I would like to invest approximately $200,000 to ensure I have money working for me while repaying the car loan.

I am not sure, though, what to invest in and where, even though I take special interest in reading investment articles. I have approximately $200,000 in a gilt-edged fund where the underlying investment, instrument is bonds. I know I should give it time and know it is a low-yielding instrument but I am not pleased with the performance and the institution is having problems. Should I change companies?

With regard to my investment, what should I do? I want an instrument that will give capital gains at moderate risk. I was looking into investing US$100 in an FX mutual fund and the balance in repos that I would roll over every six months for liquidity.

Furthermore, I read that one should not pay interest on something that loses value, but I do not have the cash to pay for the car lump sum.

- Keisha

PFA: There are two main issues to be addressed: borrowing and investing. I commend you for taking steps to educate yourself about financial matters, for being able to identify your objectives and for being committed to saving.

Let us first look at borrowing to purchase the car. There is a view that borrowed funds should not be used to purchase depreciating assets such as a car. This is not a valid position in all cases.

Outside of the fact that a car may be used to better equip you to earn a living, there are convenience factors that may justify owning one. Considering the reality of high inflation in our Jamaican society, borrowing to purchase such an asset may be worthwhile.

To delay making such a purchase makes it a more distant dream with each passing day. Furthermore, inflation is good to the borrower, for the more the price level increases, the less value each dollar repaid will have; let the lender worry about that.

Remember that your income should increase as you become more experienced and assume more responsibility at work. This should make loan repayments more affordable over time.

This is not license to spend borrowed funds buying overly expensive, costly-to-maintain motor vehicles. Modesty has a strong place here. Give yourself room to build up other assets.

Invest your time in locating a car that represents good value to you in terms of price, features and efficiency. Do the same to access funds on the best available terms to you.

Investment objectives

Now for your investments. You have several objectives: capital gains with moderate risk, liquidity, exchange rate hedge and ease of management.

Your unit trust gilt-edged investment allows you more ready access to your funds than the six-month repo you are contemplating. It may even give you a higher yield.

Investments based on interest-bearing instruments tend to give more consistent yields, but do not expect to earn as much as you would on investments that appreciate, which, by the way, are more volatile and more risky.

Compare the performance of the fund you have invested in with similar funds over the term of your investment so far. I doubt you will see a significant difference.

There is no need to be anxious if there is trouble in the financial network. Its subsidiary is responsible for managing the unit trust in which you have invested. but the trustees have full responsibility for protecting your interest. They are custodians of the assets of the fund, which are registered in their name. The fund manager being in trouble does not put your investment at risk.

For capital gains with moderate risk, the available options are mutual funds or unit trusts that invest for capital appreciation only, or for both income and growth. The latter may be more suited to you.

Increasing your investments prior to buying the car makes sense. Keep up your investment programme while repaying the loan and only borrow as much as you can repay comfortably. As you prepare to make your purchase, secure your deposit.

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