Dear reader,
Thank you on your query.
There are many issues that occur that we by no means appear to plan for, whether or not it’s automotive issues, geyser bursts, or job losses. As a lot as we want to management the probability of this stuff taking place, they’re inevitable. A well-thought-out monetary plan ought to make provision for the inevitable and will help in assuaging the stress that’s positioned on budgets when this stuff occur. Having an emergency fund ought to be one of many first stuff you think about when constructing your funding portfolio.
Fixed deposit
A fixed deposit is a monetary instrument supplied by banks and non-banking monetary firms (NBFCs) to their clients to assist them obtain their money-saving objectives. When investing in a fixed deposit, you’ll be able to make investments giant sums of cash at a predetermined price of curiosity for a fixed interval. At the top of the interval, you need to obtain a lump sum along with curiosity. Various rates of interest are supplied by banks and NBFCs.
An benefit of investing in a fixed deposit is that the speed of curiosity stays the identical, regardless of any modifications that occur due to market fluctuations.
However, if ever there’s a life-or-death state of affairs and it’s essential to withdraw funds earlier than your interval has come to an finish, it is possible for you to to take action – however you can be liable to pay a penalty.
There are tax implications when investing in a fixed deposit, however you’ll solely be taxed on the curiosity earned in anybody tax yr exceeding R23 800. This tax exemption will increase to R34 500 every year in case you are 65 or older.
Unit belief
A unit belief is a monetary instrument that swimming pools cash from many traders to speculate in belongings resembling shares, bonds and property. The income from these funding are handed on to particular person unit house owners as a substitute of being reinvested in the fund.
The good factor about unit trusts is that they’re managed by skilled fund managers.
These kinds of investments don’t require giant sums of cash to start out off with. They provide flexibility, as traders are given the selection to resolve what the frequency of their contributions shall be.
Investors can select to contribute month-to-month, yearly, bi-annually or once-off and are given the liberty to alter their contribution quantities and the frequency because it fits them.
These investments give the investor publicity to totally different asset courses and markets, and with this comes portfolio diversification.
Lastly, these investments are extremely liquid, as you’ll be able to entry your cash in as little as 72 hours. However, please preserve in thoughts that when a withdrawal is finished, it might set off a capital features tax occasion.
Fixed deposit vs unit belief
The desk under illustrates how a lot curiosity you’d earn every year when you invested R100 000 utilizing a median price for the fixed deposit and the unit belief:
| Investment sort | Interest price | Interest earned |
| Unit belief – balanced fund | 8% | R8 000 |
| Fixed deposit – banks | 7.1% | R7 100 |
* The above common rates of interest had been sourced from Absa, FNB and Investec as of 30 September 2022.
Other choices
If you search rate of interest publicity, you’ll be able to make investments in mutual funds resembling cash market funds and earnings funds.
The desk under illustrates how a lot curiosity you’d earn every year when you invested R100 000 utilizing a median price for a cash market fund and an earnings fund:
| Investment sort | Interest price | Interest earned |
| Money market fund | 6% | R6 000 |
| Income fund | 5% | R5 000 |
* The above common rates of interest had been sourced from Allay Gray, Nedgroup Investments and Foord as of 30 September 2022.
My suggestion …
My suggestion could be to speculate your emergency funds in a unit belief as a substitute of a fixed deposit, ideally a tax-free financial savings unit belief because it gives tax advantages, and you’ll entry your cash faster with none penalties.
You obtain portfolio diversification, which helps your portfolio flourish and avoids the results which will include placing all of your eggs in one basket.
And the chance is decrease because the tough choices are left to the fund managers.
That stated, I can’t name a fixed deposit a unhealthy funding because it has its personal benefits. Whatever your determination could also be, I hope the data and steering I’ve supplied will enable you to in your determination.
