The Chinese word for crisis, weiji, has often been mistranslated as comprising two symbols denoting danger and opportunity to highlight that many opportunities arise in times of danger.
Fortunes are lost and made during times of crisis where steady minds are rewarded for their objectivity.
With markets in turmoil and interest rates rapidly declining, one such opportunity is available until the end of April.
RSA Retail Bonds issued by National Treasury currently pay an impressive 11.5% per annum on a five-year bond.
Interest can be reinvested, paid semi-annually or monthly if you are over 60 years old.
Reinvesting the proceeds results in a period effective rate of 14.4% due to the magical effect of compounding; a R100 000 original investment returning R174 500 (1.745x) at the end of the five years.
Most people are unable to instinctively think in terms of compounding as has been demonstrated by the exponential growth of the Covid-19 virus.
Warren Buffett has always highlighted the magic of compounding growth over long periods of time and his advice to investors has always been to combine it with low fees.
A government-guaranteed risk-free rate of 11.5% per annum for five years with zero fees certainly meets these criteria.
There are also two- and three-year bonds yielding 7.75% and 9% per annum respectively.
Bonds beat banks right now
The RSA Retail Bond rate of 11.5% is significantly higher than the current commercial banks rate of circa 6-7%, making it a compelling long-term savings initiative by government.
Pensioners and savers who depend on rand income for their rand savings will breathe a sigh of reprieve at this opportunity, with interest rates generally having sharply declined in synch with the central bank lowering rates.
To generate a similar return one would need approximately 1.8x more capital at a commercial bank.
Unique tax aspect
One needs to also consider their unique tax circumstances as shown in the illustrative example below:
|Under 65 yrs||Over 65 yrs|
|Bond value||R930 000||R1 420 000|
|Income||R106 950||R163 300|
|Exempt interest||(R23 800)||(R34 500)|
|Taxable income||R83 150||R128 800|
|Tax @ 18%||R14 967||R23 184|
|Tax rebate||(R14 958)||(R23 157)|
Assuming no other income bonds of R930 000 for those under the age of 65 and R1.4 million for those over 65, the interest in this example would be exempt from taxes due to interest exemptions and rebates. Minors also qualify for investing if their parents apply on their behalf. At these levels of investment an 11.5% nominal, or 14.4% if reinvested, would be the net return to the investor.
Who would typically fit the investor profile?
- Requires rand income to cover expenses;
- Has rand savings available to deploy;
- A long-term investor (or willing to pay a one-period interest penalty to exit after 12 months);
- Has long-term rand requirements;
- No appetite for volatility and requires predetermined fixed outcomes;
- A low-risk investor; and
- Has a minimum investment amount of only R1 000.
Bond investments are an often overlooked asset class with returns comparable or even exceeding the JSE in recent years. In the wise words of Buffett ‘Beware the investment activity that produces applause; the great moves are usually greeted by yawns.’
Applications and payments can be made online (here) to qualify for the April rates. Rates are set and fixed per month, and could decline in May.
Riaz Gardee is a mergers and acquisitions specialist and financial writer.
The views and opinions shared in this article belong to their author, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.