Thinking of Investing Your Settlement?
By Alwyn Smit 18 Aug 2021
I am about to receive R500 000 from the Road Accident Fund. I would like to invest it in something that would give me about R5 000 a month and still keep my investment as is. What can I invest it in?
If you wish to invest in a product that preserves capital as well as generates an income, you have a choice of investing in a unit trust fund, a fixed deposit, or an RSA Retail Bond. Without taking tax or investment fees into account, a R5 000 yield per month (R60 000 per year) from an investment of R500 000 would require an annual yield of 12%.
As a general observation, currently, South African interest rates (repo rate of 3.5% and prime commercial lending rate of 7%) are currently at five-decade lows. Recent comments from Reserve Bank Governor Lesetja Kganyago in late July suggest that these rates will remain in place – ‘lower for longer’ against the backdrop of recent unrest, Covid-19, low consumer expenditure and a strained economy. It would therefore be unrealistic to expect significant changes to the performances of different investment choices listed below.
Unit trusts: The one-year and five-year historic returns of the four types of unit trust funds that are most likely to preserve capital, while generating an income are listed in the table below. We have also included the sector average maximum drawdown rates for the four categories. This is the sector average measure of the maximum loss in a month over a five-year period, measured to end July 2021.
You can see from the performances of the three categories of ‘interest generating’ funds (fund-types 1,2 and 3) that only fund-type 3, the variable income category, measured over one year (on August 6) would meet your requirement of a 12% return. However, this category’s average yield over five years does not meet your requirement.
In the multi-asset income category (fund-type 4, a category of unit trust investment where the fund managers are mandated to invest across asset classes, including property) the average performance over the last 12-month period has been 7.41%, and 7.19% over the last five years.
|Column A||Column B||Column C|
|1-year average annualised performance||5-year average annualised performance||Sector maximum drawdown rates over five years *|
|1||Money market||5% (top fund) 3.88% (average)||7.22% (top fund) 6.62% (average)||– 0.19%|
|2||Short term income||10.53% (top fund) 5.32% (average)||8.47% (top fund) 7.48% (average)||-0.31%|
|3||Variable income||26.54% (top fund) 14.34% (average)||9.72% (top fund) 7.61% (average)||-14.54%|
|4||Multi-asset income||17.81% (top fund) 7.46% (average)||10.25% (top fund) 7.22% (average)||-3.48%|
* From from August 6, 2016 to July 30, 2021
Source: FE Analytics
We have assumed that it is important for you not to lose any of your capital as you have requested that the investment should remain intact. Column C compares the drawdown rates of the different fund types over a five-year period. These figures reflect the percentage of the fund that was negative during a one-month period in any month over five years. You will see that generally, the funds that are permitted to invest in longer-dated instruments are more likely to be more volatile, but that the multi-asset sector (which is permitted a wider range of underlying holdings) has a drawdown rate of 3.48%.
Fixed deposit investments: A fixed deposit is a financial instrument provided by banks or other financial institutions licensed to do so. Fixed deposits offer investors a higher rate of interest than a regular savings account, until the given maturity date. It may or may not require the creation of a separate account. It is known as a term deposit.
A number of platforms offer comparisons of different fixed deposit rates. Examples include RateCompare, Rateweb and Skimpy. Note that the information on these sites could be dated and we suggest you check details with the banks concerned.
Further, bear in mind that some platforms include taxes and fees in their calculations, while others do not. Note that additional conditions may apply; for example, some banks may have investment minimums.
Retail bonds: A third choice would be to invest in RSA Retail Savings Bonds. As you can see from the table below, currently a five-year fixed-rate investment would pay a return of 8.5% per annum.
RSA Retail Savings Bond rates (as at August 2, 2021)
|Fixed interest rate bonds||Inflation-linked bonds|
|Term||Interest rate||Term||Interest rate|
|2-year fixed rate||6.00%||Inflation-linked 3-year bond||2.25%|
|3-year fixed rate||6.75%||Inflation-linked 5-year bond||2.75%|
|5-year fixed rate||8.50%||Inflation-linked 10-year bond||4.00%|
In conclusion, none of the options discussed here have either had or promise a 12% interest rate over five years.
You would need to take on considerable risk in order to secure a recurring income of that amount. For context, note that the South African General Equity unit trust sector has had a five-year annualised average sector return of 4.79%, with a sector drawdown rate of -22.12% over the same period.
- In the current environment, the best match with your requirements would be either a ‘variable income’ or a ‘multi-asset income’ unit trust fund. You would have to take a view on the relative risk of these funds. Our table highlights the wide range in return between the average performance and top performance of each sector. To research fund choices click on the Profile Group Fund Data website.
- A second option would be to buy a five-year fixed rate RSA Savings Bond. For more information click here.
As a side note, remember that all investors are liable for tax when you earn money on your investments in the form of interest, dividends or capital gains. Tax rates depend on your age, applicable rebates, marginal income tax rate, the type and amount of investment income and capital gains earned.