Moses asks: I am about to receive R180 000 from an earlier investment. Where could I invest this sum, risk-free for another five years?
Maya replies: The only risk-free investment is cash which pays out based on interest rates. Any other investment would be taking some form of risk.
Therefore you need to look for the best possible interest rate. One option are government RSA retail bonds. There are no costs to invest and you can purchase them at the Post Office or Pick n Pay.
Inflation-linked retail savings bond. Your capital increases by inflation and in addition you receive an interest payment equal to the difference between inflation and current interest rates.
So for example if inflation is 4% and current interest rates are 6%, your capital will increase by 4% a year and you will receive a 2% (6% to 4%) interest payment per annum, paid out every six months.
This ensures that your capital keeps up with inflation while paying out an income. However, you do not have the option to re-invest your interest and you have to take it as income, so your lump sum will not grow faster than inflation.
Fixed rate retail bond: This would pay out a fixed 8% per annum for five years and you can re-invest your interest. The downside here is that if interest rates increase you will not receive a higher rate, and if inflation picks up significantly rising to 7% for example, your capital will not grow much above inflation.
You can find out more on the website.
There are also guaranteed products like the Fairbairn Capital Inflation Plus Bond which offers a guaranteed after-tax return of inflation +2% per year on the net amount invested over a five year period. The interest is not paid out so you receive it as part of the lump-sum at the end of the period tax-free.
Mike Heeley, a financial consultant from Alexander Forbes warns that the problem right now is that you are locking in your interest for five-years at a time when we are at the bottom of the interest rate cycle.
If you absolutely have to guarantee your capital then stick to risk-free options like the RSA retail bond, however if you can tolerate some fluctuations to your capital then Heeley says the return you can expect from a low risk balanced unit trust (investing in cash, bonds, property and equities) over five-years is likely to provide a higher return, especially if any interest and dividends are being reinvested.
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