Mutual Funds (Unit Trusts) vs Endowments - Deplyoing Your Money (2024)

by Nyiko Mongwe | Mar 8, 2019 | Investing | 0 comments

Be sure to make sure that the rules are exactly the same in your country or state. Ihave not found these general to be different anywhere in the world, but be sure to check.

This is a question I used to get a lot, and I have often listened to a lot of debate around this topic. I have also come across several clients that were totally against the use of a particular product altogether, or bent on using a product without any particular reason.

Now, this may be a necessary caveat for a reader that is new to my blog, but my regular readers and my clients know this about my approach to financial planning:

The product is less important than the reason. For instance, a Mercedes Benz CLA45 AMG is a fantastic car that could make for a reasonably priced daily driver. (For those who don’t know, I am a gearhead/petrol-head, so car analogies come naturally to me).

If, however, you live on a farm or would like to make a commute from South Africa to Mozambique to the beautiful destinations of Bilene or Xai Xai, this Mercedes would probably not be your best choice for the trip. Anybody who has made this commute can attest to the terrible condition of the roads on that journey, particularly in Mozambique.

Taking a Jeep Wrangler may be a more wise choice. This does not mean that the Mercedes is a bad car; it still remains a fantastic car. This being said, taking the Jeep will also mean giving up speed, handling,and fuel efficiency. The strong, virtually pothole resistant tires also come with the penalty of increased road noise. The Jeep also is not exactly known for its speed or comfortable seating.

All things considered though, the Jeep remains the wiser choice for the journey mainly because, IT WILL GET YOU THERE!

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It is easy to reconcile that taking the Jeep would be a smarter choice because nobody wants to be stuck on the side of the road in a foreign country possibly at night and on the weekend. Similarly, this should be the kind of reasoning that we use when selecting a financial product of any kind.

Endowments have been frowned upon as they have heavy platform and management fees and relative limitations with regards to accessibility.

While these arguments are true, like the Jeep, it still has its place and context within financial planning, but good advice will dictate when this is the case.

Similarly, like the Mercedes Benz, the unit trust is light and nimble, the epitome of investment flexibility with decent returns, but it also has its time and place.

I am hoping to create in your mind a couple of questions to ask yourself when looking to choose one over the other.

The funds of a Mutual Fund (Unit Trust) can be accessed at any time, saving for funds that have not cleared as yet. This does not apply to funds that were transferred via direct deposit or EFT.

For funds that were received by the asset manager via debit order, a 45-day clearance period will apply for the simple reason that you can still request your bank to reverse the debit within this period which would create an awkward situation if you had chosen to withdraw the same funds from the asset manager.

If having free access to your investment is a priority, this is one vote in favor of the unit trust.

People who may want to eliminate the temptation of being able to freely withdraw from their investment, but know that they can borrow against the endowment on a rainy day would want to give this round to the endowment.

If you are a high earner you may want to minimize your exposure to tax by electing to use an investment vehicle that does not discriminate against your high tax bracket; you would vote in this round for the Endowment which is taxed at fund level.

Are you a lower earner? You may be placed in a position where you would be paying more tax by choosing one investment vehicle over another; you would vote for the Mutual Fund (Unit Trust) in this round as it gets taxed according to your personal tax rate.

If you are investing towards a particular cause other than yourself, such as the education of a child, a funeral or a deposit for your daughter’s first car once she gets her license, then it may be important to use an investment vehicle that may allow you to appoint a beneficiary.

This will see to it that even if you were to pass away before these events come to fruition, you will still be able to ensure that the money you have set aside fulfills the purpose that you intended for it. This is where the Endowment shines.

Funds without a nominated beneficiary will fall to your estate and will be disbursed as your estate gets wound up.

If this is what you desire and you want to use savings to create liquidity in your estate with your savings, give the unit trust one more vote.

Some investments can be used as a safe-house to protect some of your estate from creditors in case of a drastic change of circ*mstances for the worst.

While Mutual Funds (Unit Trusts) cannot afford you this protection, endowments can after three years. I’d imagine this is to make sure people don’t quickly move funds into endowments to shield themselves from liability should they realize that they have come into tough times.

This is a fantastic feature to have and must be taken into consideration.

Similarly to life insurance policies, an Endowment can be ceded to a bank or lender as collateral against a loan.

This, in my mind, can probably only be useful if you want to invest for the long-term.

Situations differ, but it’s always good to know everything, so that you can make an informed decision.

This round of voting should be assessed based on the intentions behind the investment and the nature of your estate planning.

In general, if you have a higher net worth you would need more liquidity in your estate to finance money owed to creditors, executor’s fees and outstanding tax claims that the receiver may have against your estate. All these parties would typically have to be settled first before your beneficiaries become eligible to their claim over your estate.

A Life Insurance policy is generally the best way to create this necessary liquidity in your estate to save your assets from being sold (liquidated) to create funds in your estate for this purpose.

Some people, however, may not have good health that can make them eligible for a life insurance policy. An investment policy may be the next best thing.

Also, If your estate is a large one, the use of an Endowment/s to reduce your executor’s fee liability may be considered. The proceeds of an endowment will still form part of the estate for the purposes of estate tax (duty) calculation, but there would be a saving in executor’s fees) as benefits with beneficiaries from an endowment or life insurance policy are not liable for executor’s fee payments, an advantage unique to endowments (check with your CPA for your country/state).

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I generally recommend Mutual Funds (Unit Trusts) for short term investments, an emergency fund and the financing of events. These are things people usually would take up debt to finance. My take is to use aMutual Fund (Unit Trust) for such instead.

Endowments have expensive fees and can be restrictive, but have features that can be used in a powerful way for sound financial planning.

Each of these have their time and place, so make an informed decision.

Check Out My Financial Freedom Series:

Here’s a quick overview of the series:

• 1: What Financial Freedom is NOT
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• 5: Why Your Financial Advisor Can’t Help You Achieve Financial Freedom
• 6: The Importance of Credit on Your Path to Financial Freedom
• 7: