/ 28 June 2010

The difference between interest and growth

Malisana asks: I have an investment with Stanlib and according to my understanding I get low interest. It also costs me R6,50 for the debit order from my bank account. My intention was to save to buy a car after three years. Which investment offers better interest? Where should I put my money for long-term savings?

    Maya replies: There are three issues here:

  • Understanding the costs.
  • The difference between growth and interest.
  • Your investment time horizon.

Costs
If you are investing directly without a financial adviser you should not be paying advisory fees. This is an issue I have with Stanlib because they still charge a 5% upfront fee, even if you have invested directly. If you did invest through a financial adviser, he or she should be giving you advice so speak to your adviser — after all, you are paying for it.

  • If you want to make your own investment decisions, asset managers such as Investec, Coronation and Allan Gray do not have initial fees if you invest directly.
  • There are also low-cost investments such as exchange-traded funds (ETFs) and the JSE offers an excellent range called Satrix.
  • You mention that your bank charges R6,50 for the debit order. It is a good idea to speak to your bank about whether you are on the most cost-effective banking package.

Growth vs interest
You mention that you get a low interest rate from the Stanlib investment. Unless you are in the money market fund, it is more likely that your returns are coming from the growth in the JSE

This is a very important difference because it also affects the risk you are taking with the investment.

Interest: Interest is what you would earn from a fixed deposit and you usually have a clear idea of how much interest you will earn in one year. At the moment the best interest paid is from Capitec at 7,4% per year for a 24-month fixed deposit that allows you to add R1 000 every month. If you did this for three years you would have about R40 000 saved. The money you invest and the return is guaranteed so you will not lose money.

Growth: This is the increase in the value of the investment and usually comes from investments in shares on the JSE — this is known as equities. The value of your investment can go up and down but over time equities outperform cash, and currently market experts predict the market to return on average about 10% to 12% a year — that would give you about R42 000 in three years’ time. But the returns could be higher or lower. There is no way to predict what your returns will be in the shorter term.

Investment time horizon
You specify that you have a three-year goal as you would like to buy a car with the savings. This would be a medium-term investment rather than long-term.

The general rule for an investment of three to five years is to invest in a lower-risk investment that has a mix of shares (equities), cash and bonds.

There are unit trusts that aim to protect your capital by having lower exposure to equities. These funds fall under the category of prudential low/medium equity funds. Coronation Balanced defensive fund, Allan Gray Stable fund and Investec Cautious managed fund are among the better performers.

Another option would be an income fund. These funds aim to outperform cash. Stanlib does have a very successful track record with its income fund.

Longer term savings
For longer term savings of more than five years, you would consider a fund that only invested in equities because you would have time to recover from any market corrections and you also need to be more worried about your investment keeping pace with inflation. Cash investments over time lose value due to inflation.

It would be a good idea to get financial advice for a complete investment strategy for both your shorter- and longer-term investment needs.

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