Nkuli asks: I have started saving using a notice account with Absa and am currently receiving interest at 4,6%. I am planning on taking at least R10 000 and investing it in short term (12 months) high risk and high-yield investments and continue to invest between R10 000 and R20 000 over one to three years at a time.
Please advise if this is the best way to do it. My plan is to take a portion of my savings every year and invest it in high-yield investments and return the interest into my original savings. I would appreciate it if you could also give me the possible investment vehicles to consider for this purpose
Maya replies: First point, you could be earning a higher interest rate than Absa is currently paying you. You do not mention how much you have invested but just by going on to bank account comparison site www.justmoney.co.za you will see the Nedbank Park-it account is offering interest rates of 6% for R10 000 and 6,25% for amounts over R20 000. This account only has a 14 day fixed period and thereafter it has a 24-hour notice period. If you can fix your money for 13 months, FNB is offering 7,2% for a R10 000 investment.
If I understand your strategy correctly, you would like to invest R10 000 in a high-risk investment and then take the return (interest or growth) and invest it back into your bank account leaving the original capital.
It is not clear how much risk you want to take and what you want to invest in. You could invest in unit trusts that aim to outperform cash by up to 2%.
These are usually called high income funds. If you are invested for more than a year the risk is fairly low.
High risk strategy
If you are thinking about investing in shares (companies listed on the JSE) there is absolutely no guarantee that you will make a profit over one year and there is a chance that over that period your investment could be worth less. If you are prepared to risk this capital and take a punt on one or two shares based on advice from a stock broker, that is fine, but just understand the immense risk you are taking on your capital.
Scams
You may also come across investments that guarantee your capital while paying out high returns like 20% a year. These are scams — follow the simple rule that for every percent you earn above cash, which is about 7%, you are taking on some form of risk. There is no free lunch.
Income from dividends
A less risky strategy to generate an income from a higher risk investment is an investment in a unit trust that invests in companies on the JSE that pay relatively high dividends. The Old Mutual High Yielding Opportunity Fund is an example of one of these unit trusts. Dividends are a portion of the company’s earnings that it pays to investors annually or twice a year. This generates an income which is relatively stable irrespective of the share price of the company. The income you receive from these dividends you could then invest back into your bank account without having to touch the capital. If you are able to leave the capital invested for three to five years, there is a good chance it would be worth more than what you invested.
Dividend yields (the amount that is paid out relative to the investment) is not as high as cash, but it is at the moment tax free and your original capital (investment) will also benefit from growth in the share price of the companies you are invested in.
So-called dividend funds
A word of warning: there are a range of funds calling themselves ‘dividend funds” but they are not investing in shares but rather in interest earning instruments. Firstly, this will not provide you with longer term capital growth and the Receiver of Revenue is looking into these funds as possibly trying to evade tax on interest income. These funds are run by Stanlib, Prudential, Sanlam and Absa.