Instalments - Not as challenging as you once thought

Instalments are fast becoming a product of choice for many active investors.  A recent ASX Financial Planner Research study found that 39 percent of respondents stated that instalments were included in their Recommended List and 22 percent of respondents were actively using them in their client’s portfolios.  This is a remarkable result considering that the instalment market was only developed in 1997.  Today there are more than 1,000 instalments listed on ASX  (most covering the top 100 stocks), compared to around 50 instalments issued at the end of 1998.  In August 2004, instalment turnover was close to $200 million. 

Common issues faced by investors in the past included (a) a general lack of awareness and a view that instalments were only for short term traders and (b) instalments were considered to be too administratively intensive and therefore, too difficult to deal with.  Over the past couple of years in particular, instalments have come a long way.

Firstly, as ASX’s Financial Planner Market Research demonstrates, instalments are finding their way into more and more investment portfolios.  This growth requires a better understanding and awareness of these products by both investors and advisers.   To assist in this process, ASX publishes information on instalments on the ASX website and warrant issuer websites including pricing, strategies, tax papers, e-newsletter updates, comprehensive online courses and educational seminars.

Secondly, instalments have become far less complicated to deal with in recent times.  As with most investments, the challenge is, of course, always around tax time.   How much pre-paid interest can you claim? What is the nature of any distribution income (company dividends, trust distributions, franking, foreign sourced income, etc…)? If your dividends have been re-invested (self-funding instalments), do you claim this as income? 

In recent times, warrant issuers have been able to make this process easier for both investors and advisers.  Investors now have access to tax statements that provide explanations of ‘what goes where’ in their tax return (even catering for Individual Tax payers and Self Managed Superannuation Funds sections) – effectively taking away the research and analysis that the client or advisor would otherwise have to do.  There are tax guides available for the investors looking for the latest comprehensive analysis of taxation issues.  Some warrant issuers also have interest deductibility calculators if you wish to do the work yourself.  The best bet is to talk to the warrant issuers about what information they can provide to make your job easier.

Managed funds, cash and property tend to form part of the standard offering these days while listed products, such as instalments, provide investors with an opportunity to ‘add value’ to their portfolios.  The ‘value add’ can be demonstrated by instalments being able to address a range of investment strategies such as:

• Income
• Leveraging
• Diversification
• Extraction of cash from existing shareholdings

This combined with the increased simplification of dealing with instalments will enhance the positioning of instalments as a popular investment tool in portfolios going forward.

For general information on instalments visit the Warrants section of the ASX website.  You will also find a list of warrant issuers with contact details and website addresses.  You can also request a free warrants information pack by calling 131 279.

© All rights reserved 2004. This material is educational and it is not intended to constitute financial advice.

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