How can I maximise R2.5m while protecting the capital?

Two advisors answer this reader's question.

I recently sold my home (basically paid off), and am renting a property. My question is what to do with the funds (R2.5 million). I do not need the money immediately but would like to have reasonable access to it when there is the right investment opportunity, for example, property for rental income, business, etc.

What is the best thing to do with the funds if I want to maximise income but also not take serious chances with the capital?

I do have share and unit trust portfolios and also two rental properties with outstanding bonds. I am also maxed out on tax-free investments. Do I split the funds in bonds, money market, fixed deposit, etc.? Do I settle the bonds?

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Dear reader,

From your question, we can determine that your three main considerations for your available cash would be access (liquidity), income and capital protection. Depending on your need for access to the funds, you are already thinking along the appropriate lines of money market, fixed deposit, or bond holdings. However, understanding the subtle differences between these three options can be useful.

Money market

Typically, money market accounts are highly liquid, often same-day withdrawals, and offer a reasonable interest income while being as near as can be to capital guaranteed. However, the interest rates usually would yield, at best, a figure in and around inflation once taxation on the interest is accounted for.

Read: Money market funds and accounts: Different in nature and purpose

Fixed deposit

Depending on the committed term of the fixed deposit, the interest rates will vary from slightly above money markets to well above them the longer the term of the deposit. Again, your capital is essentially guaranteed, with your only real risk of loss being if the financial institution had to collapse during the term. Liquidity would be your true challenge here since there could be limited to no access to the funds within the committed term unless you can withstand incurring a penalty or fee for early access to the funds.

Read: Best fixed deposit rates in SA in 2023


When investing in bonds, you usually have to utilise a unitised fund, such as an income or bond unit trust fund, which would invest your monies into bonds or other fixed interest instruments within the fund mandate. Over time, you would expect a great return yield from such funds compared to money market or fixed deposits, while discretionary unit trust funds are fully liquid. However, there is usually a settlement period of approximately three to seven working days, depending on the investment platform, for any withdrawals to be paid back to the investor.

Read: Where can I buy government or other bonds?

Pay off outstanding debt

You also mention that you could consider settling the outstanding debt on your rental properties. With interest rates at such high levels, this could certainly be a valuable option. However, it would then contradict one of your objectives, being liquidity. Should you settle any of these bonds, you would then be committing your cash to the physical property, and your cash flow would then be limited to the monthly rental yield.

Read/listen: Paying off your bond vs investing: What to consider

You could, of course, apply to re-bond the property in the future to access cash; however, this would incur additional costs. Ideally, you could ‘park’ the cash in these bonds without fully settling them to save on the interest on repayments until you possibly need the funds in the future. However, this option relies on the fact that these are access bonds, which would enable you to move the funds in and out of the facility.

Tax implications

Lastly, be mindful of the tax implications of your investment decisions. If we assume that you are under 65, then the annual interest income exemption of R23 800 equates to a little less than a 1% interest return in the tax year on a balance of R2.5 million. Therefore, the interest earnings above this amount, or above R34 500 should you be over 65, would be included in your taxable income and taxed at your marginal rate.

Read: Tax on investments: Answers to commonly asked questions

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Dear reader,

Thank you for your question.

Trying to decide between expanding your investment portfolio and settling outstanding debt can be difficult. There are many factors to consider when making this decision. However, we would advise you to settle your outstanding bonds before considering investing further.

Our reasoning behind this suggestion is based on the fact that you already have investments.

Settling outstanding bonds would ensure that you maximise income received from the property as you would not have to worry about outstanding debt.

In the current rate hiking cycle, debt has become increasingly expensive.

An increase in the repo rate will ultimately lead to an increase in your lending rate. Higher interest rates mean you will incur more substantial interest charges over time, increasing the total cost of your debt. In fact, the prime lending rate went from 7% at the end of 2021 to 11.75% in 2023, an increase of 4.75%. If you had borrowed R2.5 million in 2021, the annual interest amount would’ve been R175 000, whereas the same debt today would cost you R293 750, a difference of R118 750. This highlights the risk of leaving your debt unsettled.

Another factor to consider is that the prime lending rate is generally higher than the interest rate banks offer on fixed deposits. To illustrate this point, an example is in order.

Let’s assume the interest rate on your bond is 11.75% (the prime lending rate) and that the current rate on a 12-month fixed deposit is 8.75%. Given the R2.5 million, this will result in you receiving annual interest of R218 750 from the fixed deposit.

If, however, the R2.5 million is used to reduce your debt, this will result in an annual saving of R293 750 as you would no longer be making payments on the bond. You are thus R75 000 better off settling your debt.

You may diversify your existing unit trust investment by considering bond, fixed-interest and money market funds. This way, your investment is exposed to low-risk funds that will ensure capital preservation. You could set up a regular withdrawal on your existing unit trust to maximise income. However, keep in mind that a regular withdrawal might trigger capital gains tax.

Below is an example of the average returns from the different types of funds:

  Annualised returns
Funds 1 year 3 years 5 years
Income fund 8.71% 7.14% 7.24%
Bond fund 7.57% 7.84% 7.13%
Money market fund 6.59% 5.26% 6.14%
Equity fund 13.88% 18.38% 9.95%

Returns as at 31/07/2023. Past performance is not a guarantee of future returns.

If, after settling your debt, you have funds left over, we recommend considering an offshore unit trust investment (since you have an existing local unit trust investment) or alternative investments such as structured notes or whisky casks.

Offshore unit trust

  • A minimum investment starts from R20 000 to R50 000, depending on the product provider you choose.
  • Offshore investing is a good way to achieve capital appreciation as you are able to spread your risk by investing in a wide range of economies and geographic regions.
  • Considering the volatility of the rand, offshore investing is a good way for someone to gain exposure to different currencies, as well as better and more developed markets.
  • It is important to note that any amount above R1 million will need tax clearance from the South African Revenue Service.

Structured notes 

  • Structured notes are a type of debt security sold by financial institutions, banks and corporate borrowers.
  • The return is based on underlying assets such as equity indexes, interest rates, commodities, or even foreign currencies.
  • There is a variety of structured notes that fall within two categories, namely growth notes and income notes.
  • These investments are perfect for the investor who will not need access to funds in the first three years, as maturity usually happens within three to five years, depending on the note.
  • An example of a good structured note would be the Global & Local BNP Paribas Oil participation capital protected note, which offers investors a participation rate of 365% with 100% capital protection.

Read: Structured notes: The best investment you’ve never heard of

Whisky casks

  • If you are looking for an alternate offshore asset class with entry-level and high upside potential, this is the perfect investment.
  • These types of investments can produce average annual returns of between 8-12%. It is a tried-and-true maturing asset, and the longer the whisky ages, the more valuable it may become.
  • One of the advantages of investing in a whisky cask is that there is more than one exit strategy, such as selling your cask at an auction, selling the cask back to your product provider, or bottling your own whisky with a corporate label.
  • It is important to note that if you do not allow it to mature over the three- to five-year period, you may lose the chance to enjoy the returns or, worse off, make a complete loss, which means this product is not very liquid.
  • An example of a good whisky cask is the Speyside Distillery’s Hogshead cask, which offers incredible value for money. Whisky from the Speyside Distillery is becoming increasingly popular across Asia and is already very popular in Taiwan.

Read/listen: Is investing in whisky casks as smooth as the tipple itself?

In conclusion, it is advisable to prioritise settling your outstanding bonds before investing further due to rising interest rates and the potential for higher debt costs. Once your debt is settled, ensuring diversification in your overall investment portfolio is crucial as it not only safeguards your capital but also provides the opportunity for capital growth.

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The fact that 50% of the population relies on the combined effect of currency devaluation(inflation) and taxation to finance their social grant makes us realize that it is almost impossible for anyone to protect the value of his savings. The owner or saver, government employees, and social grand recipients cannot live off the same meager savings. Therefore, the government transfers the purchasing power of that stash of cash to bribe their voters.

Being a capitalist in a socialist nation is like trying to survive as a pigeon in a cattery.

End of comments.



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