What does it mean when an investment is termed short-term?
By definition, a short-term investment, also called a temporary investment, is a financial investment that can be quickly and easily liquidated. The term ranges anywhere from a couple of months to a few years.
While a long-term investment can be lifetime, a short-term investment should typically not last more than 3 years.
Since the thinking behind short-term investment is that they’ll be quickly sold, they present a nice way to put excess cash into use temporarily.
Companies with extra cash at hand tend to have short-term investments on their balance sheet. It is a way of generating income from the money they have, before they know what to do with it long-term.
For an investment to be classified as short-term, it needs to be liquid. Therefore, building houses for sale may not technically be classified as such, even though the turnaround period is short.
Types of short-term investments in South Africa
1. RSA Retail Savings Bonds
The RSA Retail Savings Bond is a way to invest with the Government of South Africa, and earn a fixed interest rate or an inflation-lined interest.
It was established by the South African treasury in 2004 and has since attracted more than R25 billion in investments.
It is one of the most accessible short-term investment option for South Africans, in that you can invest as little as R500 to start, and then top up with as little as R100 at any time.
The minimum amount you can invest was lowered to address the fact that over 70% of investors were 50 years or older – not a very good sign for the economy.
The RSA Retail Savings Bond sees better returns than other bonds offered by the South African treasury.
For instance, while a 3 year inflation-lined bond offers a mere 3.5% interest, the RSA Retail Savings Bond offers 8.75% interest. There are potentially even better returns if an investor chooses to roll over their investment and switch to the fixed-rate bonds at the end of their 3-year term.
The RSA Retail Savings Bonds is unlike other bonds in that it is neither listed nor tradeable on any exchange. The fact that it is backed by the government however makes your investment 100% secure.
What do you need to invest in RSA Retail Savings Bonds?
The only thing you need is a valid South African ID number.
Stokvel clubs with active bank accounts are also welcome to invest.
Registration is once, and subsequent top-ups should be at least R100. In the past, these top-ups were regarded as separate investments, but now they will be added to the existing investment.
Can you withdraw your RSA Retail Savings Bond before maturity date?
As mentioned, the RSA Retail Savings Bond has a three-year term. This means your investment is locked for this duration until the maturity date.
However, you can still withdraw your money at any time, but with penalties.
For instance, if an investor withdraws within a year, they forfeit all the interest earned on the cash-out amount, which can be all the money or a portion of it.
If an investor is cashing-out only a portion of the money, they must leave a R250 minimum in the account.
How to apply for RSA Retail Savings Bond
New investors can apply online by submitting the registration form, ID copies, bank statements and any other required documents on the official website.
There is however no online application option for Stokvels. They need to make a physical trip to the National Treasury offices.
*A Stokvel is a savings or investment society in which members regularly contribute an agreed amount to a central fund.
2. High Yield Savings Account
A high-yield savings account is a type of savings account that pays way above the average savings account. Typically more than 20 times more.
While that may sound extraordinary, remember that the average savings account has an Annual Percentage Yield (APY) of next to nothing. It is not uncommon for an account to have an APY of between 0.1% and 0.3%.
Therefore with a high yield savings account, you are looking at returns of between 3% and 8%.
Most banks fall on the lower side. Absa Trusave for example only offers 3.1%, Nedbank MyPocket has an upper limit of 5%, while Postbank Smart Save has an upper limit of 3.1%.
This is however still some good money to make over a short period.
3. Money Market Account
Money Markets funds remain one of the best ways to invest your money short-term.
In South Africa, they are classified by the Financial Sector Conduct Authority (FSCA) as a collective investment scheme, and therefore regulated by the Collective Investment Schemes Control Act.
Money market funds typically have higher returns than bank savings, and like bonds, have a minimum investment duration.
The funds are quite stable since they are usually very diversified. In fact, no more than 5% should be invested in any one instrument. This makes them a low risk type of short-term investment.
Virtually all major banks and investment companies in South Africa offer their own money market funds, at different interest rates.
Some of the best known in the country are:
1. Allan Gray Money Market Fund
2. Nedgroup Investments
3. Standard Bank Money Market Fund
4. Old Mutual Money Market Fund
5. Prudential Money Market Fund
6. Coronation Money Market Fund
7. RMB Money Market Fund
4. No-penalty Certificates of Deposit (CD)
According to Investopedia, a certificate of deposit (CD) is a product offered by banks and credit unions that provides an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period of time.
So how does it differ from say a savings account or money market fund? Well, unlike them, with a CD you forfeit access to your money until it reaches the maturity date at predetermined period. This can be 6 months or several years.
In short, with a CD, you cannot make additional deposits to increase your balance or withdrawals to reduce it, without penalties. The advantage of this is that they pay higher interest rates than typical savings accounts and sometimes even money market accounts.
No-penalty Certificates of Deposit are some kind of specialty CDs, where as the name suggests, there are no penalties for early withdrawals. For this benefit, you settle for lower interest rates than a basic CD.
5. Corporate Bond Funds
These are bonds issued by private companies.
Corporations typically issue bonds to raise capital for expansion, takeovers, product development etc. It is simply another form of financing that avoids bank debts.
These corporate bonds are sold in public markets to individuals and institutions, and can therefore be traded publicly like shares would. They can also be placed privately to a select group of investors.
While most corporate bonds tend to be long-term, there are occasional short-term ones.
Corporate bonds are generally considered safe for investors. It may not always work out for the company issuing them because even if it makes a loss, it is required to pay investors their agreed interest.
Generally, corporate bonds pay higher interest than government bonds.
To buy corporate bonds in South Africa, the Johannesburg Stock Exchange will be your best bet. The first Corporate Bond on the JSE was issued in 1992, and today, the total corporate debt instruments listed stand at over 1500.
Now Read: Top 5 Ways To Make Money Working from Home in South Africa
