The South African Reserve Bank (SARB) has recently given heavily indebted South Africans some breathing room. If you were drowning in debt, you would be applauding the interest rate cuts that have taken place over the last couple of weeks. Considering the state of the economy, more rate cuts are expected as seen by the rate cut yesterday. In this falling interest rate environment, borrowers continue to win as taking out debt is now cheaper.
Unfortunately, it’s the investors/savers who are negatively affected by interest rate cuts. For instance, any funds you have in cash, like in a savings account, would earn less interest. The reason for this is that you, the saver, lend money to the borrowers through the banking system. Hence, when borrowers are required to pay less interest, the bank pays you, the saver, less interest on your cash positions which you have effectively lent.
If you have cash and don’t want to place it into the equity market or other riskier investments, what are your options, considering the falling interest rate environment? Firstly, it would be advisable to find out what interest rate your bank is offering you now. Next it would be a recommended option to compare these interest rates to the rates you could receive from placing your funds in a RSA Retail Savings Bond, as seen below.
RSA Retail Savings Bonds (Fixed rates)
- 6.5% (Fixed) per year (2-years)
- 7.75% (Fixed) per year (3-years)
- 10% (Fixed) per year (5-years)
RSA Retail Savings Bonds (Inflation linked rates) – You are guaranteed inflation-beating returns.
- Inflation plus 3.5% (3-years)
- Inflation plus 3.75% (5-years)
- Inflation plus 3.75% (10-years)
Apart from the potentially higher interest rates offered, RSA Retail Savings Bonds are safer than holding your cash in a bank. This is because you are lending money to the South African Government and the chances of Government defaulting is lower compared to any of the retail banks defaulting.
The stock market and other riskier investments are expected to perform better over the long term. However, you could lose your capital and you’re exposing yourself to volatility – the upward and downward swing in the value of your investments.
If you are more concerned with capital preservation and receiving interest income, head over to the RSA Retail Savings Bond’s website which will explain the available product details (fixed or variable interest rate) and how to invest in them. With the minimum investment being only R1000, gaining some exposure to bonds is only a few steps away.