“Is the bubble about to burst?” That’s the question many people are asking in the wake of months of a particularly buoyant stock market.
According to Robert Keip, CEO of FNB Investment Products, many people have grown their wealth significantly because of the strength of the equities market. And that’s making more and more people keen to do the same.
“But there’s always the fear that the good times could be coming to an end,” says Keip. “A fall in share prices could result in large capital losses for many investors, so in some instances people are becoming more tentative about investing in the market.”
To satisfy the enthusiasm of those wanting to benefit from the improvement in the stock market but scared of the possible loss of their funds, FNB launched its Equity-Linked Fixed Deposit last year. Since then, there’s been keen interest in the product, as well as a significant increase in account openings in recent months.
“Although South Africans are notoriously bad about saving, we have seen a big demand for savings products. With a number of investment products we’ve dropped the minimum amount required to open an account, and there have been very large take-ups as soon as the minimum was dropped. So, too, with the Equity-Linked Fixed Deposit — when we dropped the minimum investment from R25 000 to R10 000, the number of accounts opened rose dramatically.”
Keip explains that because the product is a bank account, the return is classified as interest. With the increase in the amount of tax-free interest this year — to R15 000 a year (or R22 000 for seniors over 65) — the impact of tax on the interest return is not necessarily significant.
A customer must invest for a full year and, at the start of the period, a cap rate is quoted. Depending on the performance of the stock market over that year period, the customer will be paid out the percentage growth in the FTSE/JSE Top 40 Index, limited to a maximum of the cap rate.
“If the market were to take a dive in one year, it’s possible that no interest will be paid. But the good thing is that the full amount invested will be returned to the investor, unlike a direct investment in the stock market where the investor could lose his capital,” says Keip.
The product has proved popular with a wide range of investors.
“We have many retired people who have put funds into the product. The capital guarantee is obviously very important to this market,” Keip notes. “We are also seeing people in their 30s and 40s coming in, and we think they are attracted to the strength of the market but still want their capital to be secure. We have also picked up a trend in terms of our customers putting money away for their children and grandchildren.”
Cap rates are tiered according to the size of the investment. The current cap rates are quoted from 9,5% to 11,5%, depending on the amount invested.
“That’s far more than any other savings product offers, which makes this a really attractive way to grow your wealth,” concludes Keip.