Refile says: I want to start investing long term, and was wondering who between Satrix and Old Mutual gives the best interest rate.
Maya replies: This weekend I sat with my niece and a friend of hers who have started working, and spoke about how to start saving.
What I quickly realised is that they teach people nothing at school! One needs to understand the basic principles before deciding where to invest.
Before investing it is important to understand the difference between interest and growth. From there you are able to make a better investment decision as you understand the risks.
Interest
Interest is what you would earn from a fixed deposit, for example, and you usually have a clear idea of how much interest you will earn in one year. The bank will quote the interest rate and you are guaranteed to receive this interest and your original capital.
This is fine for shorter-term investments, but if you are investing for more than three years, inflation becomes a problem because interest rates paid by the bank do not give you much return above inflation. That means your money becomes worth less in terms of what it can buy you.
Growth
This is the increase in the value of the investment and usually comes from investments in shares/companies listed on the JSE — these are 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. But the returns could be higher or lower. There is no way to predict what your returns will be in the shorter term so it is impossible to comment on one investment over another. But what you can consider are the costs.
Considering that you are looking at a long-term investment that you will not need for at least five years, then you are correct in considering something like Satrix or a unit trust.
First of all read the article “ETFs vs Unit Trusts” (see related articles) to understand the difference between these different type of investments.
If you decide to go for index-tracking funds (these are investments that just give you the average of the market and tend to have lower costs) then you should look at Satrix. The RAFI index is a very popular choice and is offered by Satrix, but if you want to invest R500 or more a month then the Old Mutual RAFI 40 tracker fund is actually slightly cheaper than Satrix as it has a lower annual fee.
If you invest less than R500 then there is an upfront administration charge of 2,25%, which works out higher than Satrix’s debit order fee of R3,50.
For more information go to www.satrix.co.za and look at the related articles below.
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