Investing a lump sum

If you suddenly find yourself holding a large amount of cash, what is the best way to invest it for maximum growth? Should you put it on your mortgage, invest in the share market or look to managed funds?

You might have inherited the money, received a work payout or saved a small nest egg. While you should always seek expertise from a financial adviser before commencing with any investment, What Price My House has looked in to the overall pros and cons of each option.

Investing in shares
Shares offer greater liquidity and give you faster access to your money than other types of investments, so they’re a good option if you will need your money quickly. There are over 1200 companies listed on the ASX that you can invest in. Returns are in the form of capital growth, which is the difference between the amount you paid and sell them for, which is the increase in a share price over time. You can also receive dividends, which are a percentage of the company’s post-tax profits that many companies (but not all) pay usually twice a year to shareholders.

Getting into the share market involves a brokerage fee. You can choose to work with a discount broker or a full service broker, the main difference being that a full service broker will provide you with advice. A trade through a discount broker can costs as little as $20, but charges with a full service broker will reflect the additional service. You only need $1000 to start investing in shares, but you will need to buy in share lots of around 1000. If you want to make your own share choices, research the companies you’re interested in and monitor them to see how the company is performing. If the company or companies you buy shares in are not making money over the long term, reconsider your investment.

According to figures published by ABC Brisbane, in the 20 years to the end of December 2006, Australian shares showed average return of 11.1 per cent a year. So if you initially invested a sum of $20,000 in a company that was performing on an ‘average’ level, purchasing 20,000 shares at $1 per share, your return would be approximately $2220 for one year, minus any entry/exit costs and without the payment of a dividend.

Managed Funds
As the name suggests, Managed Funds are managed by someone else, namely a professional investment manager who pools your money with that of other investors so you have greater buying power than if you were investing alone. They invest in share funds, property trusts, fixed interest funds, cash management or a combination of these. Because your funds are being managed by someone who has more time, financial knowledge and has access to greater financial research than you do, the returns should be greater. Managed funds work best as a long term option for at least 3-5 years, and you only need a relatively small amount, around $1000 to get started. Diversification is a big plus with managed funds, which is achieved by spreading the risk across a wide range of investments. On the other hand, if one investment performs badly, it can bring down your overall profits. Entry and exit fees can range from zero to around 5%, and they do vary from fund to fund. Also compare any ongoing charges.

Returns on managed funds vary significantly, and a fund’s performance in the previous year will not necessarily predict its performance in the following year. Look at the fund’s prospectus to see whether they have performed consistently over a set period of time, which is referred to as the ‘rolling average’. Money Magazine has tipped the three top funds to watch in 2007 as the EQT SGH LaSalle Global Listed Property Securities Trust, K2 Asset Management (K2) and Challenger’s High Yield fund.

Put it on the mortgage
Paying a lump sum on your mortgage can help you pay it off faster, and will mean you pay less interest because you’ve reduced the principal amount on which that interest is calculated. First, check the fine print of your mortgage to ensure you won’t be penalised with extra charges, especially if you have a fixed interest rate as generally these are less flexible. According to the Australian Consumers Organisation or Choice (www.choice.com.au), paying off a lump sum can equate to a solid return. For instance, if you are paying a marginal tax rate of 31.5% (including the Medicare levy), you’d need to find an investment returning around 10% before tax to get the same financial benefit as a mortgage lump sum payment.

WhatPriceMyHouse.com has supplied this article for general interest and information purposes only and is not giving financial advice. Before you make any financial decisions you should speak to a qualified financial advisor.

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