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When talking about investments it’s not uncommon that people say and hold opinions such as “I think my money would be safest in a fixed-term savings plan at my bank”, or “Anything other than a fixed deposit would be much too risky”.

Naturally these sentiments are understandable considering – among others – the global financial crisis of 2008, which although essentially caused by the banks, saw them also being the only ones to be bailed out. This according to legal and financial expert Almo Lubowski, director, High Water Strategies.

What is a fixed-term savings plan?

Fixed-term savings or deposit accounts offer the ability to have a set rate of interest for a defined period of time. Usually the longer the period, the higher the interest that’s offered will be. This gives the investor the ability to get a marginally higher interest rate compared to what they would get in a normal savings account with a bank.

Fixed-term savings or deposit account investments usually carry short-term maturities ranging from one month to a few years and could also have varying levels of required minimum deposits. The more you give, the more you get, basically.

When an account holder deposits funds at a bank, the bank can use that money to lend to other consumers or businesses or it can invest the money in other financial products that pay a higher rate of return. In return for the right to use these funds for lending, they will pay the depositor compensation in the form of interest on the account balance. With most deposit accounts of this nature, the owner may withdraw their money at any time.

This makes it difficult for the bank to know ahead of time how much they may lend further at any given point. With a fixed-term deposit saving the bank has more certainty with regard to how long it may hold the funds and therefore pays a higher premium to the account holder for the ability to use these funds to achieve higher rates of return with the collective funds of all fixed-term savings account holders.

Fixed-term savings and deposits are safe investments and are therefore appealing to conservative, low-risk investors. They’re underwritten by the banking institution offering them, who, in turn, have guarantees from the country’s Reserve or Central Bank.

What else could be used?

A money market fund is a type of collective investment fund that invests in high-quality, short-term cash instruments, and cash equivalents. A money market fund investment is sponsored by an investment fund company, and hence carries no guarantee whatsoever. However, though not quite as safe as cash in a fixed-term savings or deposit account (underwritten by the banking institution), money market funds are considered extremely low risk and conservative on the investment spectrum.

A money market fund generates stable income, but they have little to no capital appreciation. Although the risk is slightly higher than a fixed-term savings or deposit account at a banking institution and the interest rate is not set, these funds often achieve a similar and sometimes even better interest return than fixed-term savings and deposit accounts. More importantly, they also have no fixed-term and you have the ability to withdraw your money almost immediately.

To illustrate let us draw a small comparison between a fixed-term saving or deposit and a money market fund actually available in South Africa:

Fixed-term savings deposit at Bank A

  • Amount: R20,000
  • Term: 24 months
  • Nominal interest rate: 6.4%
  • Interest rate fixed

Money market fund at Asset Manager A

  • Amount: R20,000
  • Term: No set term
  • Nominal interest rate: 7.39% (for March)
  • Interest rate not fixed – variable

In the above example it’s clear that although not having a fixed but variable interest rate, the money market fund would give a better interest rate, and the money would not be fixed for 24 months. Therefore, with ever so slightly more risk and no bank guarantee the money market fund may be a better option, especially due to it being more accessible.

Disclaimer: This article does not form part of a comprehensive financial needs analysis of your situation, specific financial needs and objectives in light of your entire financial and investment portfolio. You should therefore not rely on this general information alone to make a final financial decision for yourself but should ideally consult a registered financial advisor in this regard, especially if you’re unsure of anything.

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