Terata asks: I want to invest about R2 000 a month in RSA retail bonds. Can I split the money in two for inflation-linked and the fixed-interest option? I intend to invest for five years or more. Which one has better returns?
Maya replies: You certainly can invest in both as the minimum deposit is R1 000.
However, due to the fixed nature of the investment, a monthly contribution would mean that you would be making a new investment every month — each deposit maturing at a different time. It would be better to save up a lump sum for six months and then make an investment of R12 000 twice a year.
Fixed-rate bond vs inflation-linked
In terms of returns, it will all depend on the inflation rate. For a five-year investment, an inflation-linked bond will pay 2,25% and the capital would grow at the inflation rate. Currently with an inflation rate of 4%, your return would be 6,25%.
If over the five years the inflation rate averages 6%, then your return would be 8,25% per annum. If inflation averages 5%, you would get 7,25%.
Inflation is expected to increase to 6,3% early next year before decreasing again.
If you select the five-year fixed bond you would get a return of 8%. This would compare well against the inflation-linked bond and you would be receiving this return from day one.
However, if inflation surprises on the upside and rises to 8% for example, then an inflation-linked bond would deliver a higher return.
Is this the right investment for you?
Also keep in mind that the inflation-linked bond pays out the interest twice a year and does not reinvest. Therefore it is aimed at someone who wants an income, rather than growth. If you want to re-invest your full interest then the fixed rate bond is a better option.
Considering your age is less than 35 years old and that you want to save for five years, the RSA bond may be too conservative, especially as you are investing with a monthly debit order.
A monthly investment lowers your risk when investing in equities as you buy more units when the market falls, so market volatility is less of a concern. You could consider an equity-linked investment such as a unit trust or exchange-traded fund. It is expected that the markets will return on average between 10% to 12% over the next five years, so you could expect a better return than the RSA retail bond.
If you invested R2 000 a month in the fixed rate bond at 8%, you would have saved R147 000. If you invested R2 000 a month in an exchange-traded fund or unit trust that gave an average return of 12%, you would have saved R163 000.
The chance of you losing money over a five-year period when investing monthly in equities is very small, but as the money is not guaranteed it is still a possibility. You need to decide whether the risk is worth the extra return.
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