With longer term investments there are fees on buying, or selling, or both. With cash investments there are usually no fees involved in putting assets in money form. Thus the whole of the investment is working for you from the date of deposit. Any investment with entry or exit fees should be considered as medium to long term.
‘Lock In’ Or Stay Free
There is usually a need to have part of your assets in money form, and naturally you should aim to get a high return on these funds. You have to make an educated guess about which way interest rates are moving when you decide where to place money to earn interest. If you feel rates are going down, it may be best to take a one or two year fixed deposit or debenture. Don’t forget that once you “lock up” the money in this way for one or two years you may find it very difficult to get access to it unless there is a proven emergency. Some finance companies can be uncooperative when investors want to withdraw early.
Interest rates have a fairly cyclical nature. It makes sound sense to lock into cash investments when interest rates are high, but this would be quite foolish when interest rates are low.
Funds Investing
We now live in rapidly changing economic conditions and it is therefore unwise to put money away on fixed term for more than two years. Nobody can predict what interest rates will be two years from now. People who “lock into” long term investments may find themselves unable to get access to funds which could be used to take advantage of fluctuations in the economy.
Watch The Interest
We all know that you can prove anything with figures and there will be all sorts of rates offered to you. Make sure you understand what they mean. For example, three companies might offer 14% for a 12 month term. With the first you are paid the interest at the end of the 12 months, the second may pay it to you quarterly and the third may calculate and add it to your deposit (or pay it to you) monthly. Obviously the third option is the best for you. The worst is the first, because the company has the use of your interest for the whole year.
This applies particularly to bank and building society accounts. Some pay interest monthly, but some make you wait for six months. Then consider whether the interest is paid on daily balances or on the minimum monthly balance. Stay away from interest paid on the minimum monthly balance. If interest is paid on daily balances you are credited with interest based on the actual balance each day.
However, if you are paid on minimum monthly balances the interest for the whole month is calculated as if the LOWEST balance for the month was the only balance. Thus if you had $1 000 in your account at the beginning of the month and withdraw $985 on the second last day, the interest for the whole month would be calculated as if you had $15 in the account for the whole month. That’s pretty rough!
Many banks and building societies have made their interest- bearing accounts so complex that even their own staff have trouble working out one from the other. The main questions to ask are: —
Does the interest rate change as the balance goes up or down from certain points? E.g. Is it higher if the balance is over, say $1 000?
Do you suffer a penalty if the money is withdrawn before a certain date?
When is the Interest Paid?
Every rand counts — make sure you arrange your affairs so as to get the highest interest rate.
When you invest in any fixed interest deposits make sure you specify that proceeds are to be placed on 24 hour call on maturity and NOT re-invested.
Many institutions will automatically re-invest the proceeds for a further term unless advised by the depositor to the contrary. This denies the depositor the right to “shop around” for the best rates available at that time. It is unfortunately true that some institutions who automatically re-invest fixed deposits do not do so at their highest rate.
Government Bonds
Placing money in government bonds, also known as gilts, is similar to having money in cash form but with a subtle difference — government bonds can give an investor a capital loss or a capital gain. The interest rate is usually fixed, so if rates in general fall, the value of the bond will rise. Conversely, if rates rise the value of the bond will drop.
Like most other fixed-interest bearing investments government and semi-government bonds have not been a worthwhile investment in recent years. But recent changes to what is called prescribed asset requirements has freed this market from government prescription to a certain extent, with rates now generally higher than the inflation rate.
Bonds are sometimes also used by sophisticated investors during times of stock market volatility to preserve the capital values of their investments. But investments in this area is highly complex and best avoided by the layman investor.
Bankers Acceptances
It is common for people borrowing money to do so by using bankers’ acceptances (BAs). They sign a bill of exchange, which looks like a cheque, which will fall due for payment at some fixed future date which usually varies between 30 and 180 days. This bill of exchange is then stamped by the bank with the bank’s own guarantee of payment.
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