| A guaranteed yield enhancer for your client’s portfolio. |
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| Generally a well balanced portfolio has a cash portion. Cash is regarded as the safest of all investment classes and serves as the underpin to the remainder of the portfolio of bonds, property and equities. Certainly cash has proved its value in the uncertain market conditions we’ve experienced over the past couple years. The challenge facing intermediaries is in maximising the return on this cash portion without taking on risk in this supposedly secure asset class. Recent industry history is littered with failed institutions offering so-called guaranteed investments with high yields. |
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| The returns from the cash portion of your client’s portfolio must be high yielding but these yields must also be guaranteed! Yes, I said guaranteed. If you have ever experienced some torment about clients cash yields coupled with security then an Investment Deposit may help resolve a lot of worries. |
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| What is an Investment Deposit? |
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| An Investment Deposit is a yield enhancing investment (sometimes called a yield sweetener) placed at a Bank for a period of time. It works in a similar manner to normal deposits but attracts a higher rate. These investments would typically make up a portion of an investor’s cash segment of his portfolio. They are usually considered low risk yet still offer attractive yields high enough to enhance an investor’s portfolio. |
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| Different type of Investment deposits? |
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| The options include Call, Fixed and Notice Investment Deposits. Call Investment Deposits imply that your deposit is available on demand. These investment deposits usually carry a lower interest rate than a Fixed or Notice Investment Deposit. Fixed Investment Deposits, ranging from 1 month to 12 months, have a set maturity date and fixed interest rates whilst Notice Investment Deposits will only approach maturity once notice is given by the investor. Notice Investment Deposits have notice periods typically from 32 to 120 days. The role that the planner plays is to ascertain the client’s cashflow requirements and match the maturity cycle to these cashflows. In this role the planner can play a critical part in optimising the client’s yields. |
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| Why would you choose an Investment Deposit? |
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| Investment Deposits are easy to understand, offer high yields and one of the main benefits is that the rate quoted is guaranteed once locked in! This means that if you fixed your investment for 6 months and interest rates took a sudden violent dip, your rate would still be guaranteed for the duration of your investment at the higher rate. This as explained below is very different to the way interest is earned in true money market funds or unit trusts. |
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| How are these interest rates quoted? |
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| Interest rates for Investment Deposits are quoted either as nominal rates (NACM) or annual effective rates (NACA). The Nominal rate is the actual interest earned over a one month period. The annual effective rate is the effective interest rate earned if you were to keep your investment (at the same nominal rate) for one year, hence the name “annual” effective. This implies that not only would you earn interest on your capital portion but you would also receive the compounding effect by earning interest on your interest throughout the life of the investment. That’s why an annual effective rate will always be more than a nominal (NACM) rate. |
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| It is extremely important to understand the difference between the two types of rates as you may be caught out by a shrewd advertising campaign. For example a nominal interest rate of 6.98% on an investment is actually a superior investment compared to a product offering an annual effective (NACA) rate of 7.15%. On the face of it obviously the higher interest rate looks more attractive but that of course is the beauty and guile of advertising- make sure that you as an industry expert are not also misled. Be sure that you are not comparing apples with pencils when trying to understand different quoted interest rates. |
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| How are these rates linked to Prime? |
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| Usually deposit rates are linked to the Prime Lending Rate which implies that if the Repo rate is cut by the South African Reserve Bank by say, 50 basis points, generally the deposit rates offered would be lower by around 50 bps than previously quoted. However, once locked into your Investment Deposit your rate is guaranteed irrespective of what happens to the Repo or Prime rates. That’s why Fixed Investment Deposits are an easy way to protect your client from Interest Rate risk. |
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| Notice Investment Deposits work slightly differently, in that either the Bank or the investor has to give the relevant notice before any changes can be made. Therefore if Prime had to decrease, as an investor you would be protected from that decrease by the notice period on your account. Notice deposits are beneficial if you believe the interest rate cycle is going to turn as although there may be a little bit of a lag effect, yields would eventually move relative to movements in Prime. |
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| Money Market Funds vs. Investment Deposits |
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| There is one fundamental difference between Money Market Funds and Investment Deposits; the rates quoted for Money Market Funds are based on retrospective or historic yields whilst Investment Deposit rates are prospective and future oriented. This means that with a typical Money Market Fund, one does not know know what yields you are going to earn, whether it is tomorrow or next week or next month. |
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| With Investment Deposits however you will always know the actual rate which your money will earn and what it will be going forward. This means that you can plan according to your cash flow needs as your Interest Income is known and guaranteed. This is because true Money Market funds invest in the underlying Money Market instruments with different maturity dates while Investment Deposits do not invest in these instruments. |
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| Why would an IFA introduce their clients to an Investment Deposit? |
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| Investment Deposits not only offer value for individual investors but also for Independent Financial Advisors. They offer a yield booster for their client’s portfolio with short durations. They can protect their clients who are wary of volatility in the stock markets or other derivative products and they also guarantee the interest rate going forward which makes it an attractive product to sell to their clients. Advice fees are also payable by some institutions for selling these Investment Deposits |
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| How to invest? |
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| Contact Sasfin Treasury on 011-809-7834 or email sasfintreasury@sasfin.com to find out the current interest rates or any further information required. You can also contact your Financial Planner to investigate further for you. |
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