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Back to Basics
FOCUS ON – MARGIN LENDING
This issue’s Back to Basics looks at a range of investment products which you can use to assist your tax planning and how they can also help you with your investment goals.
There has been a lot of press on margin lending recently. With the recent falls in the market forcing lenders to make margin calls many investors are reconsidering who they use for their margin lending. We look at what margin lending is, how you can use this as part of a tax effective investment strategy and how to make sure you don’t get caught out with a margin call.
Investment offer
As an investment discount broker working on behalf of a large number of clients, we can in most cases, reduce the rates offered on margin loans. If you have an existing loan or are looking at a new loan, just call us on 1300 55 98 69 to see how we can reduce your interest rates.

Margin Lending (Borrowing to invest)		 Margin Lending - Gearing

One of my many criticisms of the financial services industry is the terminology. Alienating investors with jargon means that they are less likely to invest in financial products and leave their savings sitting lazily in a bank account. The term “Margin Lending” has to be up there as one of the least descriptive phrases in the industry.


If you are not already familiar with the term, Margin Loans are loans for investment purposes, ie you borrow to invest. The term ‘margin’ is a financial term for collateral/security a loan provider requires in order to ensure that their money is covered by some security.


The principal is the same as investing in your own home. Margin loans allow you to purchase managed funds or shares and only put down a percentage of the purchase price and borrow the rest from a margin lender.

Why use a margin loan?
Similar to when you buy a house, by borrowing to invest, a margin loan allows you to buy a much larger portfolio of funds and shares than you would otherwise be able to.
Benefits include:

Increasing your income & growth - By far the biggest attraction to margin lending is by doubling or trebling the size of your investments you benefit from a doubling or trebling of the growth and income of your portfolio.


Diversifying your portfolio – For investors with smaller investment portfolios that are unable to diversify across a wide range of shares and funds, raising additional funds for investment can
reduce the overall risk of your portfolio by spreading the risk across a range of additional investments.

Low interest rates – Margin loans are secured on your portfolio and as a result interest rates are typically lower than those of a personal loan alternative. As a result, investors with an existing portfolio of investments can find them an attractive alternative to unsecured personal loans.

Tax benefits – Unlike interest payments on a personal loan, interest payments made on your margin loan are tax deductible and offer a range of interest payment options such as annually in advanced or monthly in arrears.
Risks:
Whilst doubling or trebling the size of your investment portfolio has the potential to increase your gains it also has the potential to increase your losses.
Using a margin loan as part of a tax effective strategy
A simple way of looking at a margin loan is that if you are borrowing at a certain rate, say 10%, as a top rate taxpayer, you are able to claim a 46.5% deduction, giving you an effective loan rate of 5.35% (effective rate of 7% for 31.5% taxpayers). Since capital gains on investments held for more than 12 months are reduced by 50%, investors only need to return of 7.68% pa (8.43%pa for 31.5% taxpayers) for this strategy to grow their wealth.

However, if you’re a conservative investor or don’t feel that you can achieve these returns, margin lending is likely to end up costing you money.

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FUNDS FOCUS Investment newsletter: Issue 2, June 2008

5/13
Order a ZERO entry fee PDS

To download or request a hard copy Product Disclosure Statement with no entry fee, please complete order form below. Portfolio Healthchecks and the Wealth Focus annual report can be faxed back on 1300 55 98 70 or posted to us for free at Wealth Focus, Reply Paid 760, Manly, NSW, 1655
 
PDS Order List
Cromwell Property Fund

FEA Plantations 2008 Forestry Project

DDH Graham - Bank of Queensland Money Market Account

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Wealth Focus will rebate 100% of the entry fee on managed fund investments as additional units and all of the sales commission received on agribusiness (8%) listed in this issue in the form of a cheque. Wealth Focus will receive a 2% marketing commission on agribusiness investments and may receive a trailing commission of up to 1.00% pa. for managed funds, and 0.5%pa for margin loans, depending on the manager we have a relationship with. This trailing commission is paid by the fund manager and is NOT an additional charge to the investor.
Download the funds focus newsletter

This month, we have highlighted a number of investment opportunities for investors looking for returns in a falling market and cover some of the basics for end of year tax planning.
 

Cromwell (unlisted) Property Fund.

Favoured by many investors for their low volatility and tax deferred income, unlisted property funds have once again come to investor attention after they have continued to provide returns in a falling market.

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FEA Plantations Project 2008 (tax effective forestry)

There is an increasing gap between world supply and demand of timber coupled with the current tax incentives makes for a compelling investment

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Free Portfolio Healthcheck

Probably the worst thing you can do is sit on an portfolio full of proverbial "dogs" in the hope that they'll somehow get their act together and produce you the great returns overnight. We're giving investors the opportunity to get a free report across all their managed fund investments.

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Portfolio Healthcheck