BLACK FRIDAY
15% DISCOUNT
on our annual subscription.
Offer valid from 23 Nov – 30 Nov 2020.

Is a low-risk investment for you?

I'm looking for the highest returns on low-risk investments in South Africa....

Q: I’m looking for the highest returns on low-risk investments in South Africa. Investments I’ve considered so far are fixed deposits at banks, with Standard Bank’s promo rate of 9.26% being the highest so far. Any tips/ideas on other places to look for comparable rates? I tried unit trusts and got burned, so I’m avoiding that route.

 

Igor Rodionov - Advicement Investment Services

Modern Portfolio Theory, taught at universities and business schools across the world, associates low risk with comparatively lower expected returns when it comes to investing. This may not sound ideal for investors looking for quick growth, but there are plenty of compelling reasons to seek a low-risk investment. Here are some of the cases when a low-risk investment makes financial sense:

  • Creating an emergency fund: If you’re looking to set aside some of your savings in case of emergencies, a low-risk investment is recommended. By investing in a low risk investment, you will avoid the stress of significant adverse fluctuations, particularly if these fluctuations occur at the same time that you need to withdraw your money.
  • Short-term investment horizon: If you only intend to invest for a short-term period, a low-risk investment can avoid a situation in which you do not have enough time to recover your funds in the event of poor performance.
  • Avoiding investment fluctuations: If you are not comfortable when your investment fluctuates wildly, a low-risk investment is likely preferable for you. Some investors may seek to withdraw or stop their contributions during downturns, but this behaviour jeopardises the investor’s final returns as they may not benefit once performance recovers.

Assuming that a low-risk investment is indeed for you, here are the various options associated with low-risk investments and some of the ways to access them.

Options associated with low-risk investment

Fixed deposits

A fixed deposit is an account that you can open with any local bank. The bank guarantees and discloses upfront the return on your investment over the agreed period of time. When comparing fixed deposit accounts, it is advised to read the fine print and make sure you are comparing apples with apples regarding the interest type quoted. Notably, fixed deposits are typically used for saving purposes where the investor is not looking to access the money during the investment’s term, as early withdrawal may lead to penalties. The advantage of using a fixed deposit is that the investment is not subject to outside market variables and is guaranteed by the bank. There is, however, a marginal risk that the underlying bank may go bust and will be unable to pay off the promised amount.

Money market

The money market is an asset class which deals with short-term debt instruments. Investors can access this asset class via money market accounts through banks, specialised unit trusts or an exchange-traded fund tracking a money market benchmark. Typically, these instruments are associated with low risk, as they are linked to the ability of the government and corporates to pay off their short-term debts. The advantage of investing in a money market is that you have quick access to your invested amount, making it a suitable option for short-term investors.

Bond market                 

Bonds are a long-term debt instrument, typically issued by the government, government entities and large corporates. Some of the ways to participate in this asset class are by investing in specialised unit trusts or exchange-traded funds tracking a bond benchmark. Historically, the bond asset class has outperformed the money market benchmarks, but with larger fluctuations. Bond prices are closely linked to the interest rates in the market; currently, in the recent rising interest rate environment, this asset class has not shown significant outperformance. The risk associated with investing in bonds is that the bond issuer may default on its payment obligation. However, this risk is considered to be marginal, especially when the bonds are issued by a government entity or a corporate with a strong credit rating. As with the money market, this risk is reduced further through diversification since the bond portfolio will consist of a number of different bonds.

Low-risk unit trusts

Another option is to invest in unit trusts which specialise in selecting particular instruments from the above-mentioned asset classes. Some specialised unit trusts are considered low risk as they are guided by their investment mandate, which specifies what proportion of the portfolio can be invested in different asset classes. For example, a unit trust in Interest bearing categories cannot invest in equities, real estate and preference shares. Of course, this option may diminish diversification of your investment as certain asset classes are excluded. The caveat of choosing this option is that the return you will receive largely depends on the unit trust selected, the investment philosophy and the investment mandate.

Performance summaries

The following performance summary is as at end of June-2017 and shows the returns of the asset classes discussed above, together with average return of funds in certain low risk Asisa (Association for Savings and Investment South Africa) categories. Importantly, it should be used as a guide only, as future returns may vary from historical results.

Description

1-year annualised return

3-year

annualised return

5-year

annualised return

Alexander Forbes Money Market Index (Money Market Benchmark)

7.62%

6.92%

6.33%

ALBI Index (Bond Benchmark)

7.93%

7.12%

6.61%

Average Return in SA Interest Bearing – Money Market

7.81%

6.96%

6.25%

Average Return in SA Interest Bearing – Short Term

8.67%

7.28%

6.73%

Average Return in SA Interest Bearing – Variable Term

7.15%

6.53%

6.38%

Average Return in SA Multi-Asset Low Equity

3.60%

5.83%

8.49%

 

The bond benchmark has experienced the most fluctuations in the previous five-year period. Note, that having all your savings in a single asset class is discouraged, as you will forego diversification benefits when having other asset class exposures. The SA Multi-Asset Low-Equity category was included for this reason. The unit trusts in this category invest in a variety of asset classes, but are capped at 40% in equity, offering lower fluctuations than unit trusts which invest a higher percentage into equity. An observant reader will notice that the historical returns in the table did not beat the mentioned 9.26% return for the fixed deposit, making the fixed deposit a strong current option when considering a low-risk investment.

While the scope of this article is limited to providing an overview of low risk investment options in South Africa, it is also important to take into account the broader context and other relevant considerations, such as the fees involved in accessing these investments.

Note on the author: Igor Rodionov is a managing director of Advicement Investment Services which offers diversified, low-cost portfolios of Exchange Traded Funds (ETFs) through the Advicement Website and the Easy Equities platform. The Advicement Conservative Bundle (available on Easy Equities) comprises of ETFs which track some of the mentioned asset classes above and may be suitable for investors looking for a low risk investment.

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

SUBMIT YOUR QUESTION SIGN UP AS AN ADVISOR
Moneyweb Insider INSIDERGOLD

Black Friday Special
Get 15% discount on our annual subscription!
Offer valid from 23-30 Nov 2020.

Choose an option:

R63 per month
R630 per year SAVE R126 + 15% OFF

You will be redirected to a checkout page.
To view all features and options, click here.

A monthly subscription is charged pro rata, based on the day of purchase. This is non-refundable and includes a R5 once-off sign-up fee.
A yearly subscription is refundable within 14 days of purchase and includes a 365-day membership.

Click here for more information.

COMMENTS   0

You must be signed in to comment.

SIGN IN SIGN UP

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

NEWSLETTERS WEB APP SHOP PORTFOLIO TOOL TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: