A Fin24 user writes:
I have a query regarding the best way to save for a home deposit.
I have R40 000 saved up which is in a Capitec savings account, and I have had a Satrix Divi debit order of R500 per month since March 2012. The only debt I have is my car, which is fixed at 11%.
From October I will be having an extra +-R4 500 available per month due to an increase and my savings timeframe is about 18 months when the lease on a property that I would like to purchase, expires.
I know that the money market gives the lowest returns but I believe 18 months is probably too short to put the money in the equity market, due to current global economic outlook and market volatility.
Currently I'm considering moving my money over to the Investec Prime Saver deposit account which is offering 4.8% interest relatively risk free.
Are there any other investment vehicles I can consider? Wynand Gouws, head: retail channel management at Old Mutual Investment Group South Africa (Omigsa) responds:
It is evident from your question that you have a keen interest in your financial future and attaining your financial goals and aspirations.
It is also evident that buying your house is your next financial goal. Good luck, it seems you are well on your way!
Let’s first summarise your current situation: you have R4 500 that you want to invest towards a deposit for a house. In addition to this:
- You have R40 000 in a savings account;
- You contribute R500 per month to a Satrix investment;
- You have no debt except for your car, which is fixed at 11%.
As you correctly pointed out, 18 months is a relatively short investment period.
Therefore, the most appropriate investments to consider would be fixed income investments due to their relatively lower risk (equity investments require a longer time horizon because of their higher risk).
Looking at fixed income investments, there are a range of options to consider, with unit trust funds being one of the most flexible options with no upfront fees and no fixed timeframes required. Access is immediate and there are no penalties for early withdrawal.
Given your investment time horizon, there are two types of fixed income unit trust funds that could be most appropriate: money market funds and interest-plus funds.
The objective of these funds is to provide more attractive interest (and total returns) than those traditionally available to retail investors through bank deposits.
These returns are achieved by pooling individual investors’ assets, allowing the portfolio manager to invest in money market instruments that are not traditionally available to the man in the street.
Money market funds are the ideal investments for short-term investments (i e as an emergency fund, allowing immediate access for the unforeseen rainy day).
For an 18-month investment term, you can also consider an interest-plus fund, which is allowed a bit more flexibility in terms of the assets it can invest in.
This means it also has the potential to deliver better returns than money market funds. The current interest earned on our Old Mutual Money Market fund is 5.17%, while the Old Mutual Interest Plus fund aims to provide an extra 0.75% (so 5.92% currently).
The reader is however advised to compare interest rates offered by other institutions.
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