Smoothed Bonus Funds – best of both world’s

By Melissa Ramsamy-Agapitus
Head of Distribution, Old Mutual Corporate

Over the past two decades migration of post retired investors moving from the traditional known Life Annuities to Living Annuities have been observed. One of the main driving forces has been Investment Choice and a Flexible Income Structure.

What investors give up, in order to have choice, means giving up Guaranteed Income and Investment Risk Protection. Many investors may not want to be exposed to excess market volatility but would still want to have access to real returns over the long term.

Therefore, when markets are doing well, a portion from growth in an investors’ investment is put aside to smooth out future volatility or uncertainty caused by market movements. These portfolios help grow money when the markets are doing well, and manage the risk of lower returns when markets underperform.

Smoothing is a means that is used to turn unstable market returns into smoothed returns, also called bonuses. These are savings vehicles that offer steady growth by smoothing out the ups and downs (volatility) often seen in other similar investments. These are best suited to provide returns in excess of Namibian inflation in the long term. The growth in these assets is then passed on to investors by means of a regular bonus. When markets are doing well, a part of this growth in assets, is put aside to smooth out future ups and downs in investment returns caused by market movements.

One of the biggest risks to any investment is emotional decision making. Research conducted by behavioural finance experts, has shown that a lot of people don’t achieve their investment goals because they make bad choices when they see their investments suddenly drop or rise in value.
To avoid this scenario, a Smoothed Bonus Fund, especially when combined with expert advice, helps to manage this emotion and keep an investor focused on their long-term goals by smoothing out these short term ups and downs.

Smoothed Bonus Funds offer the best of both worlds, by giving steady long-term growth while minimising bumps along the way. In other words, these funds help an investor grow their money when the markets are doing well, and manage the risk of lower returns when markets do badly.
In order to achieve the best from Smoothed Bonus Funds, the following need to be taken into consideration:
1. Smoothing – when markets are performing well, a portion of the returns made from the growth assets is put aside so that it can be used to provide investors with a higher bonus, than what they would have received when markets are performing poorly. With Smoothed Bonus Funds, investors are able to smooth out future ups and downs in the returns earned by the fund.

2. Guarantees – the investor can lock in some or all of the growth in their investment by means of guarantees. These guarantees cover a series of defined benefit events such as retirement, death, disability and other pre-specified points in time. Upon the occurrence of any of these events, an investor will not lose the percentage of growth they choose to lock in.

It is critical to get sound advice from a leading financial institution therefore, services and guidance are provided through Old Mutual.