Fixed deposits vs unit trusts

2017-04-27 06:02


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FIXED deposit accounts are a useful way of investing a lump sum for the short-term, but are not good long-term investments because the interest rates are relatively low. The minimum term is one month, up to a maximum of five years.
Banks also offer investment products that allow withdrawals within 24 hours. Fixed Deposits or bank saving accounts work very well if you want to save to buy a television or go on holiday, for instance.

A unit trust investment company takes the money of all its investors and uses it to buy shares in a number of carefully-selected companies listed on the JSE Securities Exchange South Africa or other stock exchanges around the world. The amount you invest as a regular monthly payment or a lump sum can be quite small. Most unit trust entry requirements are R500 per month.
The risk is lower than that of direct investments (trading accounts) because market experts invest on your behalf and your money is spread over a range of different blue chip companies. This is an investment product with no fixed term, allowing you to buy in and leave at any time. It’s the time in the market and not the timing that makes your investment outperform inflation and other investments. However, it’s advisable to invest for at least five years as markets are inherently unstable and returns do fluctuate.
What you need to know and consider 

• A fixed deposit account offered by a bank is simply a bank account. It’s a conservative investment account rather than a transactional account. It tries to balance giving you full capital-protection with a return that attempts to track inflation.
The problem is that most Fixed Deposits fail to outpace inflation over an extended period of time and most people tend to not take into account the inflation rate, currently sitting at approximately 6.3%, and applicable taxes when making an investment decision.
Sometime playing it safe is not “safe” at all as your
money cannot grow fast enough to outpace inflation
. Investors want a reasonable personal rate of return, within an acceptable level of risk. Therefore it is important to understand that investment returns are always a function of investment risk. 

• A Unit Trust is invested across a range of different interest-bearing investments, this includes putting money into stocks, bonds, mutual funds, or real estate (among many other things) over various geographical regions, providing different risk with various financial institutions and these are managed by a fund manager.
The main driver for returns on a Unit Trust will be your asset allocation to create an investment fund that is both risk appropriate and able to achieve and outperform the relevant benchmarks? Generally speaking, the higher the sought-after investment returns are, the higher the associated risks. Therefore one must be prepared to take risks, with a view of investing in the long term, in order to achieve your objective of outperforming inflation (higher risk, higher return).

“I am not a product of my circumstance. I am a product of my decisions” - Stephen Covey

This article is an excerpt from Money Web.

You could contact me on 083 399 3905, my office on 032 944 3051 or e-mail me on for an appointment or further information and any other financial advice.


The information is only intended to be of a general nature and should not be relied upon by any part without obtaining full details from a licensed financial service provider.




By Juggie Govender of East Coast Financial Services (Pty) Ltd - FSP 44760

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