I’ve been saving up to buy a house and have R1 million in a money market fund. It doesn’t look like I will be able to buy the house within a year. Given the poor rates from money market funds, would I be better off putting the money into an income fund? What would be the downside of withdrawing within a year from an income fund, for example capital gains tax?
Given the current interest rate environment, I would definitely advise rather making use of a multi-asset income fund. Should your investment term become longer, I would advise structuring your investment to ensure more equity exposure as well. Be careful of losing too much valuable time in the market, should your timeline and goals with property perhaps change.
The current yield you can expect is almost double what the money market is yielding, so you will still have the benefit of a low-risk portfolio for your shorter-term needs, but enjoy the benefit of a higher return on your investment.
A multi-asset income fund consists mainly of local bond exposure, with some offshore bond exposure as well. The typical equity exposure for the PSG Wealth Income Fund of Funds (D) is minimal, local equity 1% and offshore equity 0.3%, the fund also includes local property exposure of 1.6% and foreign property of 0.2%. CGT will not be a risk in this case, as the possible implication will be very minor, and will fall within your annual capital gains tax (CGT) exclusion.
There are however still risks attached to cash and bond exposure. The fund is exposed to default as well as interest rate risk. You have experienced interest rate risk with your money market portfolio – if interest rates change, so do the yields we can expect on these funds. Default risk is where the bond issuer (for example the company issuing the corporate debt) may not be able to meet the capital repayments – this will depend on the financial stability and rating of the institution. Ratings are important to also view with bond exposure, a certain rating may imply a higher expected yield, but also higher default risk.
I would advise using this type of fund until interest rates start rising again, whereafter we will enjoy higher yields on money market funds again. This is something that will take some time again as rate hikes will happen when the South African Reserve Bank starts increasing rates in future.