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Where can I earn the most interest on my capital when saving for a house?

The term of your investment will play a big role in which products are suitable for your circumstances.

I am 39 years old and save a decent amount a year from working abroad. I have a private banking account simply for ease of international transfer. My problem is I don’t earn any interest on the capital. My bank advised me to get a money market account. They pay between 4% and 5% interest. The goal is to save money to buy a house. Where can I earn the most interest and what will the tax implication be (apart from the expat tax recently introduced)?

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Dear reader,

Thank you for your question!

It is exciting that your journey towards saving for a home has started. I am not sure what your timeline is and what amount you plan to save every year. I do, however, advise diversifying your portfolio more to optimise your returns in line with your goals.

Source: PSG Wealth

The term of your investment will however play a big role in the investment advice. For a shorter-term goal of one to two years, it is advised to rather be invested in cash-based funds. This is to protect you against any possible market volatility in the short term to ensure you will achieve your investment goals.

Should the investment term be longer, we have the opportunity of diversifying more and building a more resilient, well-diversified portfolio which includes all the asset classes: cash, bonds, property and growth assets (local and offshore equity exposure). At PSG Wealth we believe in optimally diversifying your portfolio. We achieve this by following a multi-manager approach. We also believe in including all the asset classes where possible.

It’s not about timing the market, or an asset class, as they all behave uniquely in different market circumstances.

Including all of them is the best way of eliminating risk and ensuring an optimal performance in your portfolio.

Being invested in a money market fund at the beginning of this year was not a bad investment choice for a shorter-term goal. However, due to a few interest rate cuts, yields have decreased quite a bit, and therefore it is necessary to revisit your investment approach in line with your objectives and goals.

Including some growth assets in your portfolio is advised over the longer term as they have historically outperformed cash over the long term. As these assets can be more volatile, we just need to allow them to have some more time in the market. By building a well-diversified portfolio, you keep the benefit of having quick accessible (liquid) funds through the components that are still invested in cash instruments, but you will also benefit from higher returns by enjoying the exposure to growth assets (by essentially owning units/shareholding in listed companies).

The graph below compares the STeFI (short term fixed interest) composite index, a benchmark widely used for money market funds, with a well-diversified investment portfolio. Since 2020 has caused many changes in the return of asset classes, and to keep up with an ever-changing environment, it is essential to monitor, review and rebalance your portfolio, when necessary, to achieve your goals and objectives.

The asset allocation of this diversified portfolio follows a multi-manager approach and is as follows:

Source: PSG Wealth

The graph below shows the decrease in the STeFI index over the past few years, compared to the same diversified portfolio as used in the graph above.

Source: PSG Wealth

Source: PSG Wealth

In the long run, a diversified portfolio is better able to outperform cash, and a suitably diversified investment should therefore be considered if you have a longer time horizon at your disposal.

On voluntary investments there can, however, be a few possible tax implications. Firstly – depending on which underlying asset classes you are invested in, for example:

  • Interest earned:

You earn interest from cash/bonds on which you will be taxed. Income tax certificates will be provided yearly. Certificates will show the respective amounts of interests earned during the tax year. For individuals below 65 years of age, the first R23 800 of interest earned is exempt and for individuals over 65 R34 500 is exempt.

  • Dividends earned:

Dividends are earned from equity exposure. Local dividends earned are exempt, however foreign dividends are taxable and will be included for income tax purposes.

  • Capital gains tax:

Capital gains tax (CGT) is triggered whenever you dispose of units and make a capital gain. You are not liable to pay CGT simply because your investments grew in a particular tax year. You realise a capital gain or loss on unit trust investments only once you dispose of the units. Disposals typical includes: making withdrawals or switches between funds. If you remain invested in the same unit trust fund, you could avoid paying CGT for as long as you remain in that unit trust fund. Investors should be careful, however, not to lose sight of their overall investment goals and objectives when considering ‘deferring’ CGT. CGT is merely one aspect to consider as part of your investment decisions. The Income Tax Act provides that a capital gain must be included in the taxable income of a taxpayer for the year of assessment. Individual taxpayers (natural persons) who realise a capital gain will be able to exclude R40 000 of any gains in the particular year of assessment. 40% of the aggregate capital gain will then be included to your taxable income and taxed at your marginal income tax rate.

When it comes to optimally structuring your investment portfolio, it is always advisable to consult a suitably qualified financial advisor. They will be able to ensure your portfolio is structured to meet your needs, and will also be able to provide guidance on the tax implications of the products you select.

Do you have any questions you would like answered by registered financial planners?

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The obvious asymmetric bet on future wealth wont be mentioned by financial advisors….Bought my first bitcoin 2016 , think it was for ZAR 600 , now sitting nicely at 230K . Obviously had its ups and downs, but just kept hodling. Currently a whole btc quite expensive , but nothing wrong with “stacking Satoshis” , each bitcoin is 100 million Satoshis. Only 21 million btc will ever be in circulation, currently 18 million mined, so the supply is mathematically capped.thus nothing wrong with buying eg 100 000 Sats/ month for –at the moment ZAR 227/month and just hold it in a secure wallet off an exchange with your own private keys. There are excellent tutorials re wallets , security and other “how to” available. And read the bitcoin white paper. Remember 2012 btc was at parity with 1 USD….and 1 USD was I think ZAR 10. Hold and ride the storm

Agree with Dunn. Invest a portion in bitcoin. Like all investments, never put everything in 1 basket – it is always risky. However, put it in the bank at interest < inflation is risky as the value of your money will be less each year (guaranteed).

Shares at the moment is potentially risky as well.

Bottom line is no investment on earth is risk free, but it will be very unwise not to invest in crypto as it surely has significant potential and momentum at the moment.

Financial repression SA. Where the savers bail out the government salaries and grants. Good luck finding an inflation rate beating return. All the banks have the same approach, why compete with negative.if you can’t beat em join em.

End of comments.

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