Shares or Funds?
Tax and Costs
Under current tax rules it is more cost effective to invest directly in New Zealand or international shares. If you invest through a New Zealand based share fund the fund is taxed at 33% on income, plus 33% tax on realised and unrealised capital gains. These taxes are applied before the investor sees any returns. (Note, our politicians are discussing changes to this, but implementation is not until 2007).NZ based share funds also do not pass onto the investor any imputation tax credits they earn from the companies in their portfolio. Also, in my opinion, many NZ based funds are high cost and badly run. So if at all possible it is best to invest directly into shares.
Practical Limits
However there are practical limits to investing directly in shares. Modern portfolio theory suggests that a share holding of 10 to 15 carefully selected companies will give an investor an adequately diversified portfolio. When you take into account minimum brokerage charges and the dollar size of a reasonable small holding of a company's shares you are looking at about $10,000 per holding. Or say, $100,000 to $150,000 for a small portfolio.New Zealand Fund Selection
The reality is that not many people can allocate this sort of money to shares, as well as keep the other elements of a properly constructed diversified portfolio.The result is that to get the proper portfolio diversification for your money you are left having to use investment trusts (funds) which pool money into shares.
There are a number of overseas based funds that can be used plus (in my opinion) only three based in NZ that are well enough run or cost effective enough to be considered.
CLICK HERE to learn about these three New Zealand based funds.
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