HEALTH MATTERS 105 Personal finance
INVESTING IN YOUR FUTURE
Independent Financial Advisor Eoin McGee gives advice on how to maximise the return on your additional voluntary contribution.
F
or most people it is a long road from when you decide you want to put a little extra away for your retirement and actually deciding whether to go the “buy back years”, “notional service” or the “AVC” (additional voluntary contribution) route. The purpose of this article is not to decide what you should do but more, what to do with your investment if you do decide to take the AVC route.
If you weigh up your options and you decide to go the AVC route, the next thing you need to do is decide how much to put in. However, don’t stop there, probably the most important decision you will make is what way to invest your money.
When the additional voluntary contribution is deducted from your salary it is then transferred to one of the life companies. The life company then invests this money on your behalf into a fund. A fund is a collection of all customers’ money into one “pot”. The fund manager, the person responsible for running the fund, then allocates the money based on the set criteria for that fund.
For example, all companies would have a managed fund. A managed fund is generally invested into a broad range of assets classes, such as shares, government bonds and gilts, property, cash and sometimes commodities.
When a fund is first set up, the parameters in which the fund manager can work are laid down. These parameters typically dictate what percentage of the fund can be invested in each asset class. A typical managed fund may be able to invest between 50-80 per cent in shares with the balance divided into the other asset classes such as bonds, property, cash and commodities.
What each fund manager is trying to do is to outperform their peers. This comes with some difficulties, however. The main one,
“if you weigh up your options and you decide to go the aVc route, the next thing you need to do is decide how much to put in.”
in my opinion, being that no fund manager wants to be caught with his or her pants down when the tide goes out. They usually play it safe and do not do anything wildly different to anyone else. This results in similar returns and similar mistakes being made by all funds. There are one or two notable exceptions to this. Some funds are actively managed. This means that there is a fund manager with a team behind them that not only decide what the appropriate asset split should be but also what individual shares to buy in what sectors and in what geographical area or what properties to buy and where. There is another way of investing in funds, however, and this is by investing in indexed funds. The difference between an
active managed fund and an indexed fund is that the indexed fund simply tracks or mimics the index. The most well known index in Ireland is probably the ISEQ, the Irish Index of Irish shares.
The ISEQ is made up of the top 28 companies in Ireland based on their size. A size of a company is calculated by multiplying the share price by the number of shares there are in the company. This gives you a value for that company. The bigger the value the higher up the index it goes. Some people believe that in well- established markets such as the US, investing in the index will provide more
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