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Fixed deposits versus unit trusts

Reader’s question answered: The search for a reasonable rate of return.

Q: Having some money in a fixed savings account – where I get a mere 7.1% interest – is not making me optimistic about 2017. What are other options I can look at? I would ideally want to put away a minimum amount of R500 per month. I’m not really looking for the lump sum options, just something better than what I currently have. Any advice?

A: Your question touches on two areas of focus: product and performance.

Which product on the market is best suited to your needs?

The only parameter you have provided me with is the entry level requirement and payment method (debit order) of R500 pm. I will have to assume other considerations such as the investment term, liquidity requirements, tax requirements, income requirements, intermittent additional contributions and risk profile. Considering this, I would suggest looking at a unit trust (UT), simply as it provides you with the most flexibility in terms of the parameters I’ve just listed.

Whether your goal is owning your own home, higher education for your children, or even an overseas trip – it’s much easier to start saving once you have a goal in mind. Ask yourself the following. Are you a short-term or a long-term investor? A short-term investor would be better suited to a fixed deposit (FD) with a bank. A long-term investor (more than five years) would be suited to a UT. I always warn my clients not to tie up all their funds in long-term investments. Life is notoriously unpredictable, so you need a certain amount of money that you can access in an emergency. This is why I have suggested a unit trust, as it provides you with full liquidity at all times. 

Let’s briefly compare a UT versus a FD account. It’s important to note that it’s dependent on personal preference and the investment horizon is vast in terms of options. Each of us is in different financial circumstances. Therefore, it is very important that you meet with a qualified wealth manager to undergo a detailed and systematic process of analysing your investment objectives, risk profile and investment time horizon. This consultation will provide you with a more detailed response to your question and a better understanding of all your options.

Fixed deposits vs unit trusts

FD accounts are a useful way of investing a lump sum for the short term, but are not good long-term investments because the interest rates are relatively low. The minimum term is one month, up to a maximum of five years. Banks also offer investment products that allow withdrawals within 24 hours. FDs work very well if you’re young and want to save to buy a television or go on holiday, for instance.

A UT investment company takes the money of all its investors and uses it to buy shares in a number of carefully-selected companies listed on the JSE Securities Exchange South Africa or other stock exchanges around the world. The amount you invest as a regular monthly payment or a lump sum can be quite small. Most UT entry requirements range between R300 to R500 per month. The risk is lower than that of direct investments (trading accounts) because market experts invest on your behalf and your money is spread over a range of different companies. 

This is an investment product with no fixed term, allowing you to buy in and leave at any time. However, it’s advisable to plan to invest for at least five years because markets are inherently unstable and returns do fluctuate. Most financial institutions offer UT products. 

What you need to know and consider

Let me first congratulate you on realising that placing your hard-earned savings in an FD is not as safe as many people think. A FD account offered by a bank is simply a bank account with a more ‘aggressive’ interest rate. It’s a conservative investment account rather than a transactional account. It tries to balance giving you full capital-protection with a return that attempts to track inflation. The problem is that most FDs fail to outpace inflation over an extended period of time and most people tend to not take into account the inflation rate, currently sitting at approximately 6.56%, and applicable taxes when making an investment decision.

Sometime playing it safe is not ‘safe’ at all as your money cannot grow fast enough to outpace inflation. This is of course the minimum requirement for most investors – yourself included I assume, as you’re looking for a higher yield/return. From my many years of experience in helping investors achieve their financial goals, I have concluded that investors want a reasonable personal rate of return, within an acceptable level of risk. Therefore it is important to understand that investment returns are always a function of investment risk. 

A UT is invested across a range of different interest-bearing investments, over various geographical regions, providing different risk with various financial institutions and these are managed by a fund manager.

The main driver for returns on a UT will be your asset allocation: how has the fund manager combined equities, listed property, bonds and cash to create an investment fund that is both risk appropriate and able to achieve and outperform the relevant benchmarks? Generally speaking, the higher the sought-after investment returns are, the higher the associated risks. Therefore you must be prepared to take risks, with a view of investing in the long term, in order to achieve your objective of outperforming inflation.

If you’ve got an investment term over a five-year period, you’ve got a relatively good chance of beating inflation – even by as much as 5% or 6%. This return is not guaranteed, but it is achievable and probable with the correct investment strategy. Any yield above a bank rate suggests that additional risk has been taken. Sometimes, fund managers invest in higher-risk investments in order to boost the return to investors (higher risk, higher return).

When selecting which investment option to choose, you need to do your homework and find out what the fund, asset manager or institution is allowed to invest in. If the yield is higher than its competitors, then there is even more reason to ask questions. It may be that the fund manager has managed the duration of the financial instruments effectively, or they may have invested in lower investment-grade instruments. Ask what rating the fund has been given by a credible institution such as Morningstar.

Explore the investment options available to you through UTs.

The most basic question you must ask yourself when you decide to buy a particular UT is: is it an equity, bond or money market fund? This inevitably means exploring and understanding the various asset classes of a UT fund. There are three broad asset classes based on risk:

  1. The highest risk is associated with equity class – including listed property known as a Reit (real estate investment trust).
  2. Second is the bond class.
  3. The third and lowest is the money market class.

Balanced funds

Investing directly in the stock market is great if you have the time, skill and money required. If you neither have the time nor the inclination to test your wits against the stock market, and are seeking diversification, then I would suggest investing in a balanced fund. The goal of the most balanced funds is to create steady, long-term wealth for investors by balancing income generation, capital growth and risk of loss, using a mixed selection of assets. They aim to beat the average performance of similar UTs without taking any more risk.

Balanced funds are suitable for you if:

  • You are looking for steady, long-term capital growth
  • You are ideally investing for at least three years
  • You are comfortable with taking on some risk of market fluctuation and potential capital loss

In conclusion:


Fixed deposit

Unit trust


Provide a high degree of capital protection and funds invested in a bank can be insured should the institution (bank) fail.

Tend to offer no capital protection. Security though can be achieved in proper diversification and allocation of assets. Negative correlation is your friend. Ask the wealth manager to explain the standard deviation of the fund selected.


Tend to have a minimum balance requirement and penalise you if this isn’t met. They most likely will transaction fees for things such as deposits, withdrawals, statements etc.

The most common fees associated with UT are:-

  • Adviser 
  • Management 
  • Administration
Make sure each fee is fully disclosed and you understand how this can erode and returns on your investment


The returns tend to be guaranteed (disclosed upfront) and vary from 0.5% to between 7-8% in most cases. What’s important to note is that interest earned is sometimes simple and not compound interest. The products are also structured in a manner that requires you to save large sums of money in the account as to access the higher end of interest rates offered.

The performance of a UT is not guaranteed. Depending on your asset allocation it can be closely tied to market movements. A balanced fund typically aims to outperform inflation by 5% over a period of over 5 years. This is also in part because the interest earned is compounded over that period.


FD accounts may charge penalties if the funds are accessed prior to the agreed fixed-investment period. This is not always the case and most importantly, funds can be accessed.

UT provide full-liquidity over the investment term with no penalties. The key consideration when accessing your funds is capital-gains tax, which may be payable dependent on the amount withdrawn and the investment performance of the fund.

By investing directly in unit trusts, investors are able to utilise the annual interest exemption of R23 800 for individuals under the age of 65 and R33 000 for individuals 65 years and older, as well make use of the annual Capital Gains exemption of R30 000. 


Mduduzi Luthuli is head of wealth management at Luthuli Capital.


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I would say a 12 moth fixed deposit of R1000+ at Nedbank would give you a relatively good return, 8.83% risk free. I am considering putting my hard earned cash in a 12 month fixed deposit account motioned above, until market conditions get better and when there are more certainty. Do you think it is a good option? Your replies are greatly appreciated 🙂

Hi, just remember now in that above mentioned article, certain investments are charged at simple interest rates and not compound interest rates at the banks. Depending on your investment term, compound interest always beats simple interest over a longer investment term. A 8,83% return at the bank if it is simple interest p.a. for the next 5 years on a R1000 will give you R1441.5 in total back… in a unit trust investment, most returns on investment is calculated according to compound interest… lets take a R1000 compound at 8,83% R1526,66. Your tax structure is also better in a unit trust investment vehcile

Banks have not beat inflation in 20 years. Saving in a bank is a guaranteed loss! Why do you save @ +5% and pay a home bond @ -9%? Why do you save at 5% and pay a car loan of -14% and credit cards of -19% YOU ARE GOING BACKWARDS.Remember :Core inflation” does not include Food, Petrol & Electricity.Savings and investment are 2 different things. Educate yourself. Financial Fitness is truly needed.Everyone runs to brokers that are going to help them. Are they helping? It’s YOUR MONEY LEARN!Financial Fitness

Ryon and Finfit – Thanks for your replies. I appreciate them greatly. I will for sure not put my money in the bank.

Banks have not beat inflation in 20 years. Saving in a bank is a guaranteed loss! Why do you save @ +5% and pay a home bond @ -9%? Why do you save at 5% and pay a car loan of -14% and credit cards of -19% YOU ARE GOING BACKWARDS.Remember :Core inflation” does not include Food, Petrol & Electricity.Savings and investment are 2 different things. Educate yourself. Financial Fitness is truly needed.Everyone runs to brokers that are going to help them. Are they helping? It’s YOUR MONEY LEARN!Financial Fitness

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