Sat | Jul 21, 2018

Oran Hall | Investing your inheritance

Published:Sunday | April 15, 2018 | 12:00 AM

QUESTION: Our father died in 2016 and didn't have much to leave behind after a very costly illness period. I recently sold his car for $255,000 as it was very old and needed a lot of repairs. I want to invest the money with a financial institution for my younger brother, who is 13 years old, so that when he is ready for college, he has a little 'gift' from his father to even assist with the costs. I would like some financial advice as to how to invest this money for the child so that it beats inflation and attracts very good interest.

Cleo

 

FINANCIAL ADVISER: You have a real balancing act to do. You cannot risk losing any of that principal but need to generate yields in excess of inflation and thereby have a good sum of money for your brother in another five years or so.

The table on this page shows the inflation rate and the yields of a money market fund and a capital growth fund for the period 2013 to 2017. The unit trust yields are those of just one unit and are not necessarily reflective of overall yields in the unit trust sector. They are used just for illustration.

You will notice that the inflation rate was higher than the yields of the money market fund in some instances and less in others. The yields of the capital growth fund exceeded the inflation rate in all five years.

Although I did not include 2012 in the table, the return on the money market fund was 7.8 per cent, but it was negative 15.4 per cent on the capital growth fund. It is quite normal to see fluctuations in the returns of capital growth funds.

The rate of inflation is now significantly less than it was several years ago and the yields of instruments linked to interest-bearing securities have also fallen significantly, so based on the current situation and the outlook for the future, you can hardly expect to earn "very good interest" on the funds nor be able to beat inflation using instruments linked to interest-bearing instruments or just interest-bearing instruments themselves.

The Ministry of Finance and the Bank of Jamaica have not been very active in the market for medium-term funds with maturities of about five years. From my research, the last such instrument was issued in 2016. It was a Benchmark Investment Note with a maturity of six years so it will mature in 2022, and pays interest at 7.75 per cent.

Recent issues of money market instruments do not look promising either. Of the Treasury bills issued in March, the average yield of the three-month bills was 2.98 per cent and of the six-month bills was 3.17 per cent.

 

TAX-FREE INTEREST

 

It is important that you secure your principal but you need to grow the funds. I am suggesting that you invest a portion in a money market fund or in an interest-bearing instrument for five years that will allow you to earn tax-free interest. These long-term savings accounts are marketed by many financial institutions under various names.

You could invest the balance in a capital growth fund. If the best happens, I believe you will be able to beat inflation, but the best may not happen and you could lose a portion of your principal.

I have suggested investing in a capital growth fund over investing directly in equities because of the lower risk to which the former exposes you. If you buy equities, you are limited in how much you can buy because of the relatively small amount of funds available to you.

If you invest in a capital growth fund, you can benefit from ownership of units in a fund that invests in many stocks spread across several sectors of the economy, and, depending on the fund, one that also invests in real estate. Diversification should moderate the loss of capital in the event that the equities market slips.

I hope that all goes well with you as you do what you can to secure the education of your brother, but suggest that you consult a licensed securities dealer for further guidance.

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

finviser.jm@gmail.com