Short-term investments in South Africa are vital if you want to store your savings in a secure place. These methods have a better interest rate than most places offer, so you can make money while accumulating enough finances to make the subsequent big-ticket purchases you are eyeing.
Bank Deposits (i.e., Cash funds)
This is an excellent solution for those who prefer the protection of a bank account, yet some still want some decent returns on the money they have parked. The only downside is the extended time that one must wait before reassessing the funds. If time is not an issue, this might be one of the safest ways to earn interest on your large amounts of money.
The argument for bank deposits is even if one invests in stocks, such as the S&P 500, which historically has a similar interest rate. You are likely going to leave your money in the stocks for an extended period. Although the catch is – with most stock markets, it’s in your best interest to have your cash inside the system for extended periods. With bank deposits, you have no choice but to leave them there.
Schalk Louw, portfolio manager and strategist at PSG Wealth, now prefers shorter-term 32-day notice deposits – rolling them over and renewing every few months – rather than fixing them at a long-term rate, say, over 60 months.
This makes much more sense, as now, if something comes up and you need to dive into your savings for a wedding, travels, a new car, or a funeral, you don’t have to wait 49 months to do so. You can plan and cash in on your investment at the end of the month. This is not to say you should make these large purchases within a month, but having the flexibility to choose which month you want to cash in instead of the prolonged time is a great luxury.
Schalk Louw explains another reason that short-term deposits might be more beneficial. He believes that interest rates will begin to rise faster than many people expect and that if you fix your investment amount for too long, you risk committing to a lower-than-necessary rate.
Bonds
A bond is similar to an I Owe You (IOU) in that the borrower agrees to return an amount plus interest. Government bonds are issued by countries and guarantee to repay an amount at a predetermined interest rate at a particular period.
Think of a bond as being the bank for the government. Like you will pay back a hefty interest if you take out a loan from the bank. The government is simply taking out a loan from you and paying you the interest. The only downside is that the banks and government have more negotiating power. That’s why the bank’s interest and the interest you get are different amounts. The one with the most negotiating power usually gets the best deal; in this case, it is the government and the banks.
With the government’s finances in shambles, South African bonds have had to provide investors with a somewhat respectable yield to compensate for the risk.
You may often invest in local bonds through unit trusts, which should have earned you around 9% last year (excluding expenses). However, it is not assured (or expected) that bonds will yield the same returns this year.
Money Markets
The money market is where governments and businesses borrow money for a short period. Banks that provide Money Market Accounts as part of their suite of accounts will announce the interest rates upfront, so consumers know exactly how much interest they will receive on their assets in the future. From a risk standpoint, the funds in a Money Market Account are subject to the risk of a single bank, meaning if that bank goes bankrupt, your money might be jeopardized if the bank experiences financial difficulties. On the other hand, Money Market Accounts are low-risk and highly liquid, and account holders may access their cash quickly.
Money Market Accounts are enthralling for many investors because they give the customer 24/7 access to “their” funds, making Money Market Accounts ideal for housing emergency funds required at short notice or where an account holder needs to make frequent withdrawals. They provide incrementally higher interest rates than savings accounts and slightly less than what is offered by a typical savings account. As part of the Money Market Account provides, most banks include online banking, ATM capability, and debit and stop order features, allowing account holders to withdraw cash and deal at their leisure. Because these funds are so liquid, the interest rate paid on Money Market Accounts is often lower than that paid on Fixed or Notice Deposit accounts.
Short-term investments are essential for your finical stability, as this enables you to have a safe place to “save” your money when you need to be able to access it quickly. These places of keeping your money are also great if you foresee an economic crisis up ahead. In such a case, you can take your money out of the riskier markets and park them in a safer place so most of the turmoil can pass. Although, before making any investing financial decision, remember that everyone’s needs and situation are different, so first, talk to a financial advisor.