Managed Fund Savings Plans -1st September 2007
Peter Freeman - Money Magazine
Super's generous tax concessions may have made it the investment vehicle of choice, but anyone who puts virtually all their savings into super is probably making a mistake. For one thing, tough rules mean super can't be accessed until you reach your preservation age � which ranges from 55 to 60 � and retire.
For another, the history of superannuation changes means it would be unwise to assume the rules won't be tightened in the future. At the very least, money invested in super is subject to much greater legislative risk than non-superannuation investments. Given all this, sensible investors will direct a reasonable part of their savings into other areas.
An important option that mimics one of super's key features � building wealth by making small but regular investments � is the managed fund savings plan. You make an initial investment in a particular managed fund and then organise to make regular monthly contributions.
Donald Lobo, technical manager with Bridges Personal Investment Services, says these are simple to operate � a straightforward BPAY transfer is often all that's needed � and can serve a diverse range of investors.
"Technically there is nothing difficult about them and there are no additional fees involved," he says, adding that they are also very flexible since they can be started or stopped relatively easily.
The accompanying table outlines the key features of the savings plans attached to 10 mainstream Australian share funds.
Ron Hodge, head of discount broking group InvestSmart, says most managed funds, including many multi-sector funds, offer similar savings plans. "Some managers don't really promote them, but it is usually just a simple matter of arranging to make a regular monthly contribution from your bank account," he says.
Lobo says making a direct debit straight from your pay is often a good strategy, although he cautions that savings plan investments are made from after-tax, not pre-tax, salary.
This contrasts with salary sacrifice contributions to superannuation, made from pre-tax salary with the only tax payable being the 15 percent tax when the contribution goes into the fund. As a result superannuation will be the more tax-effective option for all but those on very low incomes.
As already noted, however, super's preservation rules and legislative uncertainty mean there are good reasons for building up at least some savings outside super.
The motivation for using managed fund savings plans rather than other non-super investment options, include:
Imposing savings discipline on yourself.
Saving for a specific goal, such as the deposit for a home, buying a car or financing overseas travel.
Reducing risk via dollar cost averaging.
Peter Thornhill, principal of Motivated Money and a specialist in investment psychology, says the discipline imposed by savings plans is one of their most important features. "They can be a very effective way of ensuring you actually save part of what you earn rather than spend it all," he notes.
Thornhill adds, however, it is crucial to do at least two things before you set up your savings plan. First, work out how much you can really afford to divert to it. This is mainly a matter of assessing your discretionary spending and seeing what you can do without.
Unless you go through this process honestly there is a risk that, in the first flush of enthusiasm, you will actually start trying to save too much each month. If so, the financial pain may quickly dampen your savings commitment and, with the stroke of a pen, you will bring the plan to an early end.
Second, set yourself a goal you want to achieve and a time horizon. In some cases the goal will be fairly general, such as building up additional retirement savings.
Even in such cases, it is better to try to target a specific figure and set yourself a timeframe. "Having a strong goal will help you resist the temptation to dip into your savings," says Thornhill.
One of the strongest goals is the desire to save a deposit to buy a home. While home ownership may be more difficult than ever to achieve and is unlikely to be the best way to build long-term wealth, it is still a goal many Australians prioritise.
You need to start saving early, but not through a conventional bank account or interest-bearing deposit. Provided you give yourself enough time � at least five years but preferably seven to 10 � a managed fund savings plan is likely to deliver a much bigger deposit.
It is even possible to set up a savings plan that incorporates regular borrowings, boosting your chance of reaching your savings goal.
Of course, investing in shares carries more risk than putting your money in the bank, while gearing adds yet another layer of risk. But for many people, regular gearing into shares offers their best chance of reaching a savings goal.
Whether you gear or simply use a standard savings plan, investing each month gives you the benefit of dollar-cost averaging, and helps limit your risk. Your money isn't invested all at one time so you aren't exposed to the full impact of a sudden market correction.
But "dollar-cost averaging does have its costs," says Lobo, noting that an investor would have been much better off making a big investment in Australian shares three or four years ago rather than investing gradually.