You are here:Article Detail 25 April 2014

Inflation Plus: what is it?
Question:
I have heard and read so much about inflation plus investments, but what I do not hear is specifically what these investments are!  Are they "freely" available to the man in the street? 

Investing in the stock market could give you inflation plus returns, but there is a considerable risk factor.

There are one or two unit trust funds that market a segment called "inflation plus" — Prudential is one of them.  There are no guarantees given on the return above inflation.

What other such investments can someone reaching retirement age comfortably invest in?

Answer:
With over 900 Collective Investment Scheme Funds (unit trusts) available, the investment market can be pretty daunting. With every fund that opens, a new name needs to be established and therefore a number of "names" start floating around. These include some idea of what the fund is about.

Until more recently, funds were often named according to their "risk" status. In other words, the lower risk fund (those with higher exposure to risk management assets like bonds and cash) would be labelled as "Defensive" or "Conservative" whereas the higher risk funds (those with higher exposure to growth assets like property and equities) would typically have names such as "Aggressive" or "High Growth".

The inflation plus funds are typically funds that are designed to target a specific return.

Considering that the first rule in investing is to beat inflation, the return is pegged in relation to inflation and, more importantly, how much above inflation you are looking to achieve. Due to the useful nature of inflation plus targeting when planning your investment strategy, asset managers have started labelling and managing certain funds on this basis.

So what are they?

Remember that despite there being over 900 funds out there, these funds are all investing into the same capital market (global funds excepted) and are utilising the same assets in managing their funds. Inflation plus funds are no more than a fund that is constructed to target a specific return and this is primarily done through asset allocation.

Once you have an idea of how hard your money needs to work for you, a return target is set. The higher the target is, the more exposure you’ll be likely to have in equities and property. When it comes to risk (volatility) the same rules apply — the higher the growth asset exposure, the higher the volatility and return expectation will be.

Most funds have a benchmark that is returns based and can therefore be compared in terms of an inflation plus strategy and consequently very accessible to the man on the street.

Although far from a solid rule, what you’ll find is that "Conservative Funds" would probably benchmark a return of inflation plus two percent, "Balanced" at inflation plus four percent, "Moderately Aggressive" at inflation plus six percent and "Aggressive/High Growth" at inflation plus eight percent (which is in line with long term equity performance and in all likelihood 100 percent invested in equities).

Whatever the name, be sure to understand whether the fund you are investing in is appropriate for your investment goals and any risks thoroughly considered.

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Source : I Africa
 
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