The South African Reserve Bank’s announcement that the repo rate would rise by 25 basis points is not the best news for consumers. But Nedbank’s Head of Retail Investments, Sisandile Cikido, says a change like this is an opportunity for smart investors to diversify their investment portfolios.
‘An interest rate hike means that the loans you have (for example hire purchase agreements or mortgages) will be more expensive. But it also means that the interest banks pay on certain investments will be more. And a higher interest rate cycle is the ideal opportunity to take out an investment that would lock in that rise over the medium to longer term, because in due course, interest rates will go down again’, says Cikido.
She further explains that certain notice and term-investment accounts tend to offer higher interest rates after an interest rate hike. ‘When the interest rate is high, opening an investment account is a way of locking in that benefit, even when the cycle turns.
Cikido emphasises that diversification should be a key principle of any investment portfolio. ‘A fixed-rate or term investment involves investing money for a specific number of months. During that time, you cannot access your money without being charged a penalty fee. And to maximise growth, you should capitalise the interest that you earn. It’s also wise to have money in an account with a variable interest rate that you can access quickly in emergencies. Covid-19 proved the value of this approach as the proverbial ‘rainy day’ became a reality. Life goes on during a crisis, and you need access to money within a reasonable time,’ she says.
The table below illustrates how your money can grow if you invest it in a Nedbank 12 months Tax-Free Fixed Deposit available to South Africans to take advantage of the higher interest rate depending on how much you invest.
The above illustration proves that, thanks to the interest rate hikes we've seen since November 2021, there’s never been a better time than now to start your investment journey. With that said, investors should always ensure they get good advice, says Cikido.
‘Every investment has pros and cons. For example, if the interest rate goes even higher, a fixed-rate investment would not benefit from the extra rise, but it will protect you when the interest rate drops. In contrast, an investment with a variable rate will benefit from all the interest rate hikes, but your returns will decrease as the interest rate inevitably goes down. Good investors always look at the bigger picture to optimise their investment portfolio.’
This post and content is sponsored, written and produced by Nedbank.
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