Skip to content

Why Tying Up Your Capital Isn’t Always The Best Idea

During this past December holiday, I learnt a valuable lesson about ageing. Don’t get me wrong, I am still very young and I don’t see a grey hair on my head. Not because I don’t want to, but because my eyesight has deteriorated. Back to the lesson. So, the car was packed and we finally started our relatively short journey to Hermanus when my wife made the suggestion that we abandon our regular route via Grabouw and take the coastal route via Kleinmond, as it was such a beautiful summer’s day.

My first reaction was that we shouldn’t fix something if it isn’t broken. We always take the same trusty route that has proven shorter in the past, because it works for us. Long story short, we did end up taking the scenic coastal route, it wasn’t really that much longer, and it was at least 200% more beautiful. What does this have to do with my investments, you ask?

This week I was asked about investing in a 60-month (or five-year) fixed deposit account. Should you, as many investors do, just reinvest for the same fixed 60-month term if you have funds that are maturing soon, seeing that it’s easy, it gives you a more decent return than cash in the bank and most importantly, it just works? Well, I would like to give investors something to think about.

It’s important to consider where we find ourselves in the interest rate cycle. Should you lock your funds in a 60-month fixed deposit and interest rates rise during this period, you may miss out on better returns during this period. At the latest SARB MPC meeting, Reserve Bank governor Lesetja Kganyago said that “the implied policy rate path of the Quarterly Projection Model (QPM) indicates an increase of 25 basis points in the fourth quarter of 2021 (as in November 2021) and further increases in each quarter of 2022, 2023 and 2024.

As usual, the repo rate projection from the QPM remains a broad policy guide, changing from meeting to meeting in response to new data and risks.” If the QPM forecast turns out to be correct, however, we are still facing a number of significant future interest rates hikes. Tying up your money for a prolonged period of time may therefore not necessarily be the best option.

Investec CCM1 Month
Fixed Deposit
3 Months
Fixed Deposit
6 Months
Fixed Deposit
36 Months
Fixed Deposit
60 Months
Fixed Deposit
Notice Deposit
RSA Retail Savings Bond 2-year Fixed Rate
R50 000 –
R5 mil

Table 1: *Rates quoted on a nominal annual compounded monthly basis (excluding fees) as at 24 January 2022 (Source: Investec Corporate Cash Manager and RSA Retail Bonds)

Using the rates above (Investec Corporate Cash Manager as at 24 January 2022 and RSA Retail Bonds) as a guideline, it may be better to consider investing at a fixed rate for a shorter period of time, including a retail savings bond as an option, or to rather consider the rates offered by something like a 32-day notice deposit account for a shorter period. This could free up your funds sooner if interest rates were to rise, possibly giving you the opportunity to reinvest at a higher rate later.

Another alternative with a similar risk profile (although slightly higher) is a combination of either an RSA Retail Bond and/or a 6-month fixed deposit and/or a 32-day notice deposit, or even combining any of those with a SA Interest Bearing Short-term or Variable Term Fund (or better known as an income fund), depending on your personal risk profile, of course.

According to the ASISA classification, the main difference between a SA Interest Bearing Short-term and a Variable Term Fund, is that SA Interest Bearing Short-term funds “invest in bonds, fixed deposits and other interest earning securities which have a fixed maturity date” (Source: ASISA) and they are “less volatile and are characterised by a regular and high level of income”. SA Interest Bearing Variable Term funds also “invest in bonds, fixed deposits and other interest-bearing securities. These portfolios may invest in short, intermediate and long-dated securities”. Their risk profile is still much lower than that of equities and properties, but historically, compared to the shorter-term income funds, they are slightly more volatile.

When we compare these fund categories to something like money market over the past 10 years, you will see that SA Interest Bearing Short-term funds delivered an average of 0.74% more than regular money market, while SA Interest Bearing Variable Term funds delivered an average of just over 1.4% more. But I need to make this clear – just as my coastal holiday route, the road to higher returns had more twists and turns (volatility) at times, so make sure that you do your homework properly before you just invest in what feels easiest to you.  

 10-yr Ann Return
SA IB Money Market6.14%
SA IB Short Term6.88%
SA IB Variable Term7.56%

Table 2: 10-Year returns on relevant ASISA Sectors, up to and including 21 January 2022 (Source: Morningstar)

Be sure to discuss your options with your financial adviser, who will be able to provide you with a more detailed analysis taking into account other providers as well.