By Hopeton Morrison,
Contributor
WE ARE particularly pleased when young people such as this teenager shares his (or her) thoughts with us:
"I was reading your column in the business section of The Gleaner dated May 2, and this lady was talking about fixed deposit, tax-free investment account etc. and I do not know much about this long term investment. What I would love you to do is explain what is:
A fixed deposit
A fixed-rate account. Are there conditions applying in having a fixed account?
A tax free investment account.
A long-term investment savings
The lady also stated that the deposit is $100,000. Do you have to deposit so much money or does it depend on the institution you join? You see I am a teenager and when I e-mail institutions and ask these questions they do not respond. I do not know if it is because of my age, but they do not seem interested. However I would love if you would respond. If the long-term savings is not right for me as yet what do you recommend?"
Thanks for your letter and please be assured that we are very happy to respond to your queries. In very simple language a fixed deposit is a sum of money that you invest into a financial institution (e.g. building society, credit union, commercial bank) for an agreed period of time. Let us say that you found yourself with $10,000 that you have saved from gifts you received from family members or friends over a period of time.
FIXED LENGTH OF TIME
You go to the financial institution with this $10,000 and ask that it be invested for one month, two months, three months or even longer at an agreed rate of interest set by the institution. The rate is set by the institution for small sums such as $10,000 but for large sums usually close to or above $1,000,000 the rates are negotiable. That is, you can negotiate with the financial institution for a fraction or more of a percentage point. What you have done is invested this amount for a fixed rate of interest and for a fixed length of time. Incidentally, a fixed deposit is the same thing as a fixed-rate account.
Persons invest in fixed deposits for a number of reasons. First, you know what your returns will be at the time when you are making the investment and so the only risk involved here is the soundness of the financial institution in which you are investing.
These days great care is taken by the regulators which are the Bank of Jamaica (BoJ) and the Financial Services Commission (FSC) to ensure that all deposit-taking institutions adhere to strict "safety and soundness" guidelines. Generally though, because the risk here is low your returns are usually lower than higher risk investments in other asset types especially stocks (also known as equities) where your returns can be very high (as many investors are now enjoying in the current bull market on the local Jamaica stock market). A Long-Term Savings Account (LSA) is just as the lady to which you referred explained it last week.
You have to invest for a longer term, at least five years in this case and you can only withdraw 75 per cent of your interest once a quarter if you chose to. At the end of the five years your full principal which you had invested and whatever interest you have saved is paid back to you.
Finally you ask about tax-free investments. There are a number of these. First of all the LSA is tax-free. If you invest in the 10 local unit trust funds, these will all offer you tax-free benefits (although special conditions apply in the case of some of the funds). Mutual funds (also available locally) are also unit trust type investments. And you can invest in the stock market which offers tax-free returns. See below for our comments on both mutual funds and stocks. And you don't need to have $100,000 to invest in a fixed deposit. Many of the financial institutions around will start a fixed deposit account for you with as little as $5,000 or $10,000. It is not possible to explain everything today so keep reading these columns for more information.
A SECOND READER WRITES:
"I have been an avid reader of your column in The Sunday Gleaner and have found your advice very informative. There are a few areas which I would like your comments on:
I can set aside approximately $10,000 each month for investment. In last Sunday's article you informed one reader that one viable option to further her investing goals was to seek the advice of an independent financial consultant. I would like to benefit from such a service as I want to start saving for a home and retirement. Do you know where I can find such persons?
I am considering purchasing some units from the Jamaica Unit Trust. How do unit trusts operate and what are the benefits in investing in them? I have done some preliminary research and found that they offer three options for investment: Gilt Edge, Income and Growth, and Capital.
Also, how do I go about purchasing stocks. I want to start investing. I listen to the reports where certain stocks are performing well. How would I go about purchasing some of these stocks?"
You have asked a mouthful here and I don't know if we can cover everything you need to know in the limited space of this column. Many of our respondents ask about independent financial advisers. The place to find out about independent advisers is at the Financial Services Commission which has a register of all advisers (independent and otherwise). The financial services market in Jamaica is a big and an expanding one and definitely there seems to be considerable business out there for those who offer advice independent of any of the financial houses.
It would take a dedicated column to explain about unit trusts and the benefits of investing in them. Briefly stated there are 10 unit trust funds now operating in Jamaica. The three funds that you have mentioned are actually from one company, the Jamaica Unit Trust which manages three funds namely: Income & Growth, Capital Growth and Gilt Edge. The other seven funds are: from Barita (Capital Growth and Money Market funds); DB&G (Money Market and Premium Growth funds); and Sigma Manufacturers (Real Estate, Equity and Fixed Income funds). There is also a locally based mutual fund, the JMMB Select Index Fund that invests exclusively in Jamaican stocks. There are other off-shore based hard currency mutual funds that are managed or sold by local institutions but these will be for a future column.
A question frequently asked is whether mutual funds and unit trusts are one and the same. Often the terms are used interchangeably here in Jamaica but there are a couple of technical differences between them.
First of all unit trusts hold securities to maturity with the trust expected to dissolve when most of these securities have matured. Unit trusts should have a fixed termination date but in Jamaica and in some other jurisdictions the practice is for these funds to reinvent themselves on maturity and therefore to carry on indefinitely.
SECOND DIFFERENCE
A second difference is that mutual funds are actively managed portfolios and for this the fund charges a fee. On the other hand unit trusts are bought on a 'Buy' price and sold on a 'Sell' price. The difference between the two becomes the broker's commission and is also used to cover the overhead expenses of the trust.
Both types of schemes are defined as "Collective Investment Schemes". These schemes are usually more suitable for the small investor because of their relatively low expense, their liquidity (which means that buyers and sellers can either purchase or dispose of their units quite easily) and their diversification into a mix of securities resulting in them sometimes referred to as "balanced funds".
Both unit trusts and mutual funds pool money from many investors which accounts for the term collective investment scheme. This pool in turn creates considerably greater buying power for the smallest investor in the pool than he would have under normal conditions. And yes, these obviously represent a good way to start investing because in theory you are getting expert management of your limited funds in much the same way that a large investor does.
You asked about stocks. There are 10 brokerage houses around and you can go to any one of these to buy stocks. They are: Barita Investments Ltd; Capital & Credit Securities Ltd; DB&G; First Global Stockbrokers Ltd.; JMMB Securities Ltd; M/VL Investments Ltd; Mayberry Investments Ltd; NCB Capital Markets; Paul Chen Young & Co. Ltd; and Victoria Mutual Wealth Management Ltd. These represent the brokerages but there are other institutions around that will facilitate your purchases on the exchange.
When we invest in the stock market we receive returns on our investments (ROI) in two forms. First, dividends (that is the portion of the profits made by a company that is paid out to investors like yourself) are tax-free in Jamaica. Secondly, capital appreciation also called Capital Gain occurs when you sell a stock and its value is higher than what you paid for it when you bought it.
Based on a question that we have received from another reader we will look again at stocks next week.
* Please send comments and questions to: hmorrison@
stccu.com. Hopeton Morrison is general manager of St. Thomas Co-operative Credit Union Ltd. and lecturer at the University of Technology's School of Business Administration.
