Starting from scratch with “Questions and Answers”: A manual for utilizing the new “Mashate NISA” (New Installment System).

From savings to investment. Prime Minister Fumio Kishida’s “Asset-Income Doubling Plan,” which calls for the active participation of Japanese citizens in investment, will change the system that forms the core of the plan. The NISA (small amount investment tax exemption) system, which exempts tax on investment gains, will be greatly expanded starting in 2012.

Profits from the sale of stocks and investment trusts and investment gains are subject to a tax of approximately 20%. Under the current NISA, the maximum amount of tax exemption is 400,000 yen per year for the “nemate” NISA and 1.2 million yen per year for the general NISA (ordinary stock transactions).

However, after 20 years under the existing NISA, or after 5 years under the General NISA, investors had to choose whether to sell their stocks and investment trusts or transfer them to a taxable account. The General NISA and the “Temporary NISA” cannot be used together, and the lifetime tax-free investment limit for the “Temporary NISA” is 8 million yen. This is a meager resource to solve the “20 million yen retirement fund problem” that has long been a cause for concern.

The new NISA, on the other hand, allows for two levels of investment: a “savings account investment limit” for long-term investment and a “growth investment limit” for selecting and buying individual stocks. The maximum amount of lifetime tax-free investments will total 18 million yen, and the tax-free holding period will be indefinite. The increase in the maximum annual investment limit for the “reserve investment limit” to three times the current amount will have a particularly large impact.

The average household holding financial assets is 16.98 million yen and the median is 7.5 million yen, so most people are within the 18 million yen limit. This is, in effect, the government’s grand bargain of almost no tax on investments made by ordinary households,” said Yasuhiko Fukano, a financial planner.

There are “standard” accounts and investment trusts.

With a savings account, you can invest as little as 100 yen per month. The advantage of a savings account is the “compounding” effect, in which investment gains are reinvested to generate additional investment income. What happens if the lifetime tax-free investment limit of 18 million yen is used up by investing only in a single investment limit? Economic journalist Taiki Yorifuji estimates.

Let us assume that the investment rate is 5% per annum. If you invest 50,000 yen every month, after 30 years when the quota is used up, it will amount to 41.61 million yen, and after 50 years from the start of investment, it will amount to 110.41 million yen. This means that your assets could increase by more than 90 million yen from the principal amount.

The risk of investing in a savings account is relatively low, as you can invest at your own pace. The first step is to open a securities account and create a NISA account. Mr. Yorifuji explains which securities company to choose.

The mutual fund products offered by all securities companies are similar. If you have accumulated Rakuten points and are familiar with the so-called “Rakuten economic zone,” I think you should open an account with Rakuten Securities. In terms of points, SBI Securities is another option. You can earn “V Points” from Sumitomo Mitsui Card, which is an advantage in areas other than investment.

In the case of Rakuten Securities, you can open a NISA account either by mail or via smartphone. Once your identity is verified, you can start trading.

The “Mutual Aid NISA” has a fixed number of stocks that are eligible for mutual funds. Even so, SBI Securities offers more than 180 stocks, making it difficult to decide which ones to choose.

Mr. Yorifuji continues.

For beginners, I recommend using an index fund linked to a stock price index such as the Nikkei 225 as the axis of investment. The price fluctuation is relatively small, and they are suitable for clear and solid investment. The first two that come to mind are the SBI Global Equity Index Fund or eMAXIS Slim All World Equity. Both are all-country products that invest in the entire world, including Japan and the United States. The performance of the SBI All-Country Equity Index Fund has been relatively stable, with a solid 8.21% return (after-tax distributions + gains on sales) over the last five years. A single all-country type investment trust is also a good choice. If you want to increase the weighting of U.S. stocks, you can combine it with investment trusts such as SBI V U.S. Equity Index Fund or eMAXIS Slim U.S. Equity (S&P 500).

For those who want to take a little more risk and still get a high yield, it is a good idea to accumulate active funds, in which the fund manager decides the composition of the investments. Mr. Fukano, a former manager of a fund manager, says, “Active funds have high trust fees.

The problem with active funds is that they charge high trust fees, but there are some investment trusts that have achieved returns that exceed those fees. I recommend the Corporate Value Growth Small Cap Fund managed by Asset Management One. It consists of dozens of small-cap Japanese stocks and has returned 15.54% over the past five years.”

A sensible investment design would be to buy a small combination of stable all-country index funds and other products with high return potential.

Incidentally, for those who want to use their “growth investment quota” to buy individual stocks, which stocks should they target? Mr. Yorifuji, the aforementioned director, says, “If you want to use the “growth investment quota” to buy individual stocks, which stocks should you target?

Mr. Yorifuji says, “It is best to take the stance of aiming to improve investment performance with individual stocks. Among Japanese stocks with good performance, choose stocks such as Kubota and Komatsu, which are resistant to share price declines and plunges.

Of course, one can also buy U.S. stocks. Yorifuji says it is better to buy stocks with stable growth.

I recommend buying stocks of large companies such as Procter & Gamble (P&G) and Coca-Cola, which have been raising their dividends for more than a few decades. Individual stocks have larger price movements than investment trusts and are therefore more risky, so it is best to limit your investments to about 30% of your NISA limit.”

Questions about NISA resolved at once

Many of you may be investing in NISA for the first time. Until the system is transferred to NISA, there will be many questions that come to mind. Let us try to answer them one question at a time.

Q: Do I have to set aside money every month?

A: It does not have to be monthly. If you make purchases at least twice a year, it is considered accumulation under the system, so you can skip months when you do not have enough money.

Q: If I already have a NISA account, do I need to go through the procedures for transferring to the new system?

A: It is not expected to be necessary. They will be automatically transferred to an account with a reserve and a growth investment limit.

Q: Is it possible to change the financial institution of the securities account, such as from Rakuten to SBI?

A: Yes, it is possible. Each financial institution has its own application format, so you can apply online to change your account while continuing to accumulate funds.

Q: Should I wait to invest until ’24, when the new system starts?

A: “There is no need to wait. This is because the current system and the new system are different, and the 400,000 yen maximum tax-exempt limit for this year’s savings will continue separately. The sooner you can get the benefits of compound interest and tax exemption, the better,” said Yorifuji.

Q: In theory, one could theoretically achieve “18 million yen as fast as possible” with 300,000 yen per month x 5 years. Should we aim for this?

A: “I do not recommend it. If you accumulate investments over a short period of time, you run the risk of getting caught up in high prices. The theory behind the “As a rule,” says Yorifuji, “is to invest for a long period of time, 10 to 20 years.

Q: What should I not do with a savings account?

A: Many of the investments in a series often produce negative returns in the short term. If you sell at that time, you will not get the benefit of compound interest, and you will be left with only losses. It is important to keep a certain amount of cash and deposits and to invest surplus funds in order to be prepared for a sudden need for money.

Q: Should I give up other financial products such as student insurance and government bonds and focus solely on the new NISA?

A: “NISA does not guarantee the principal, so if something like the Lehman Shock occurs, it will reduce your assets in one fell swoop. You should only combine NISA with cash and deposits to build assets,” says Fukano.

While there is no “100% certainty” in investing, as long as one does not go against the theory, it is certainly an attractive and safe system. Let’s take the right risks and form stable assets for retirement in the long run.

From the February 10, 2023 issue of FRIDAY