I recently saw an advert for RSA Retail Bonds that was advertising “risk-free” returns. This kind of thing really gets up my nose and in my opinion it smacks of false advertising…RSA Retail Bonds are not the only culprits – just about all of the banks do it too. “No fees or commissions” or “Risk-free”.
Let’s get this straight – there is no such thing as a risk-free investment. The reason they are advertised as “risk-free” is because they are only ever referring to one kind of risk; that of volatility! These “investments” never refer to inflation risk and they also assume that “default” risk could never apply either!
Broadly speaking there are 2 kinds of risk that really matter to investors: volatility and inflation and they are kind of on the opposite ends of the risk spectrum from one another. Volatility is a short-term risk whereas inflation is a long-term risk.
When things like RSA Retail Bonds claim to have no risk associated with them they are referring to volatility and that is all. They are not claiming to be risk-free, especially when it comes to inflation risk. This is, in my opinion, misleading. You could well invest your money into these kind of investments believing that you are taking no risk at all (because that is what the adverts imply) and then find out that when your investment falls due that you actually have less money (in real terms) than when you started off – all because you did not take enough risk. It’s kind of ironic that in order to counter inflation risk you need to take some volatility risk.
On top of this, any money invested into the RSA bonds is locked in for a minimum of 2 years. The historic returns from these investments have been around 7% pa. By contrast, if you had invested into an “enhanced income” type unit trust fund you would have had returns of ±8-10%* pa for the past few years and would have had access to all of your capital within 48 hours…and all because you took a little bit of (volatility) risk!
So be warned; RSA Retail Bonds are not “risk free” as is claimed. They carry a significant amount of inflation risk, especially after tax.
*typically these funds are designed to generate returns of “cash+2%”pa. This is not guaranteed and there is a small amount of volatility risk that could apply over periods of less than 12 months.
Heard a radio ad this morning for RSA Retail Bonds…it went something like this…“There’s no fees or commissions therefore it’s a great way to save”. I disagree strongly with this statement – it is not a great way to save.
It is a great way for people to generate income – at 7.25% for 2 years it is still the best rate out there, but as a long term savings product it is pretty poor. Even at 8.25% the 5 year rate is way below what you could reasonably expect from a balanced fund and the All Share index generated about 11.5% pa for the past 5 years.
I have long been a fan of the RSA Retail Bond and still am for people looking for income but as a savings option I think that it is pretty poor – you can do significantly better over the long term – even after fees and commissions – if you are prepared to put up with a bit of volatility risk.
But not for long…
If you are looking for income from your cash then the RSA Retail Bond (2 year fixed-rate option) is still offering 8% – that’s about the best “guaranteed” option available. But that rate is likely to fall by about 0.5% at the beginning of December (the repo rate was cut by 0.5% to 5.5% last week).
To qualify for the 8% rate you need to have invested the money with them before the end of November, so you still have about 1 week to go.
On an amount of R500000, the difference between 8% and 7.5% is about R208 per month…that’s about 13 cappuccinos or about 26 litres of petrol…worth getting a move on in my opinion.
I don’t think I would go for the 3 year option at this stage…it is quite a long time and rates are likely to start increasing again sometime in the not too distant future. With the 2 year option, you at least have the option to increase (re-start) your bond after 1 year…so if rates have increased in the next year you can participate in that increase. I guess the only risk with the 2 year option is that rates fall a bit more in the next 2 years and are still lower by the time you need to re-invest your bond but looking at all the yield curves this looks highly unlikely.
Thanks to Atlantic Asset Management for the help on forward rates.
The short term outlook for interest rates seems to be bad for those that are living off interest income…it looks like interest rates could stay low for quite a while and it is even possible that we could see another cut before the year end.
(Once again) if you are a pensioner living off interest income your “salary” has effectively been halved over the past few years by all the interest cuts and while inflation might officially be at some unbelievably low level the cost of living seems to have risen (oblivious to these low inflation figures).
So if you are looking for interest income, what are your options?
The “only” option (in my opinion) is the RSA Retail Bonds – the 2 year rate is still 8.5% while the 3 and 5 year rates are 8.75 and 9% respectively. There might be other products out there offering similar or even slightly higher rates but the reason that they are offering higher rates is because there is higher risk associated with them. The RSA Retail Bond is guaranteed by the SA Government (which is about the safest guarantee you can get in SA).
An “investment” of R100000 for 2 years would give you the following monthly interest:
- RSA Retail Bond – R708.33 (R8500/12)
- Capitec – R650 (R7800/12)
- Nedbank – R454 (R5450/12)
- FNB – R467 (R5600/12)
- ABSA – R463 (R5560/12)
- Std Bank – R450 (R5400/12)
- “Average” Money market unit trust – R500 (R6000/12)
Rates on the RSA Retail Bond are adjusted at the end of the month (unlike money market rates which move daily) and so if you are looking for interest income and are prepared to lock your capital away for the next 2 years then you still have until the end of September to invest at 8.5% (it is quite possible that the rate will be adjusted downwards by 0.5% at the end of Sep).
Based on the above information (and that available on the various bank websites) I would stay far away from all of the “big 4” bank fixed deposits – even unit trust money market rates are better than their rates.
I heard an advert on the radio last night for Nedbank’s new “Park-it Limited Edition Investment account”…seems that if you give them R10000, they will give you up to 6.25%* interest per annum and after the first 14 days you can have access to your funds with 24 hour notice. There are at least 2 problems with this…
- “Up to” 6.25% (turns out you need to invest R1million to get this rate – R10000 gets you 5.75% – the small print says that the rate will be tiered according to the balance.
- You cant access the funds for the first 14 days.
Now while this may not be a problem to anyone not needing the funds urgenlty, it is certainly a problem to anyone thinking of using this as an emergency fund. To my mind, there are far better options both for emergency fund money and also for those looking for high interest accounts.
For emergency money you are going to struggle to beat a money market unit trust account – no fees to get in or out, instant access (24 hour notice on most), the best interest rates and most importantly of all, safety! The historic yield on a money market unit trust fund is ±7-7.5% but dont expect this going forward – rates have fallen and it is more likely to be ±6.5% for the next 12 months. (Minimum investment amounts are not as high as the banks would have you believe and there is even a money market unit trust that will take a R1000 debit order.)
There is also Capitec Bank which is offering an incredible 7% on daily savings accounts – this is an awesome rate and an excellent alternate to the unit trust but only for the first R10000 (the rate falls after that)!
Longer term investors looking for high interest rates should consider the RSA Retail Bond – this is a government guaranteed bond with 2, 3 or 5 year options. The 2 year option is currently 8.5% and on all of them you are locked in at that rate for at least 1 year – thereafter, if rates have increased you will be able to increase the rate on your bond for the remaining period as well. If rates fall your rate stays fixed! No fees to get in and interest can be paid monthly!
As a rule, my advice is to stay far away from banks when looking for interest bearing investments – they are there to make as much money from you as they can – there are far better options than the traditional banks!
Much was made about the RSA Retail Bond when it was launched and about how it would provide a safe and cheap investment with a reasonable returns to the “man-in-the-street”.
Well, I have been trying to buy some of these for a “man-in-the-street” using the RSA Retail Bond website – what a nightmare. There is an application form online but no details where to submit it or how to pay the funds into an account.
So I sent an email to the address on the site – 4 days later and still no reply. So I tried calling the telephone number (which is the number investors are supposed to use if they want values) and it just rings and rings and rings until it goes dead…
I know that you can also buy these at Pick n Pay or via the Post Office but if that is the only way to do it then why have forms on the website? And if no-one is going to reply to emails or answer the phone, why have an email address or telephone number on the site? And if you are not going to reply, how do you expect investors to get information or communicate with you?
This is my first experience of using this investment vehicle for a client and so far, I am not impressed.
I have written to the communications manager at National Treasury – let’s see if we get a reply.
With interest rates having fallen so far and the possibility of still more cuts on the horizon, anyone looking for interest income is pretty hamstrung at this stage. Money market rates are 7% per annum and many of the banks are offering “exceptional rates” for 1 year fixed deposits. They will even “enhance” this if you are over 55.
For anyone who is prepared to be locked in for a while there is an even better option that has been overlooked while short term interest rates have been high and that is the RSA Retail Savings Bond. It is a 2, 3 or 5 year option that is being offered by the SA Government (National Treasury) directly to the public and the interest rates are far better than anything else out there (and there are no fees to get in). The only “catch” as I can see it is that you are locked in for the period (you can exit after 12 months but there will be an exit penalty). The rates are in the table below but for more information on this go to www.rsaretailbonds.gov.za
CURRENT INTEREST RATES
|2 Year Fixed Rate
|3 Year Fixed Rate
|5 Year Fixed Rate
They also have an inflation linked option which is also quite attractive.
That’s all for now