Retail bonds might not be sexy, but they make sense

Useful for saving for specific goals like children’s education

25 July 2019 - 16:10
Retail bonds a a safe savings bet. Picture: 123RF/dolgachov
Retail bonds a a safe savings bet. Picture: 123RF/dolgachov

Retail savings bonds are a bit like sensible shoes: sturdy and comfortable but not very sexy. While they’re risk-free (meaning your capital is guaranteed) and attract no investment costs or fees of any kind, the interest you earn won’t shoot the lights out, and you won’t be able to access your money for 12 months. 

Prem Govender, a financial planner who holds the certified financial planner accreditation, says one of the reasons retail bonds aren’t more popular is because brokers haven’t made a fortune from marketing them. An investment in a retail bond doesn’t trigger the payment of a commission to an adviser. 

Since retail bonds are not sold – meaning investors must actively buy them from a bank, the post office or directly from National Treasury, many people are unaware that they exist, she says. 

“There is a certain sophistication and mystery attached to retail bonds. And if people don’t understand how these instruments work they tend to shy away from them,” Govender says.

In simple terms, a retail bond is a fixed interest investment offered by the government to incentivise us to save. The government uses the money to finance a part of the budget deficit, and to pay for general government priorities such as education, health, and infrastructure.

There are two RSA retail savings bonds on offer: a fixed rate and an inflation-linked retail savings bond.

The interest rates on offer on the fixed rate bonds are currently 7.50% a year over two years; 7.75% over three; and 8.25% over five years. 

On the inflation-linked bonds the rates are 3% for three-year bond, 3.25% for the five-year bond, and 3.50% for the 10-year bond. 

Inflation-linked bonds give you back your capital adjusted for inflation, plus your interest. In other words, you get the return that is quoted over and above the prevailing rate of inflation.

These are respectable rates at a time when equities are delivering low or no return, as has been the case for the past five years. 

Terry Msomi, the director of bonds at National Treasury, says retail bonds have delivered an average return of 7.5% a year over the past five years compared to the 5% annual average return from equities.

When you consider inflation, which was 4.62% last year, 5.27% in 2017 and 6.34% in 2016, according to Stats SA, an investment in equities has barely beaten inflation. These investments also attract a host of fees, including management, performance and adviser fees. “If you’re investing directly with a stock broker, you need to consider the brokerage fee, too,” Msomi says. 

Most people don’t think of the impact of costs on investments, especially when investing smaller amounts. Owing to inflation and costs, in real terms (meaning, after taking account of inflation), you haven’t done well investing in equities in the recent past, he says.

Retail savings bonds are useful for medium-term savings for specific goals like children’s university fees or an expensive event like a wedding.
Financial planner Prem Govender

 “When you’re investing, preservation of capital and an inflation-beating return are your key concerns. Or there’s no point at all.” 

Due to the no-risk nature of retail bonds, they attract more conservative investors. Msomi says about 60% of people investing in retail bonds are over the age of 50. But there is a strong case to be made for younger investors to use them, too, says Govender. 

She says anybody serious about having a balanced portfolio of investments should consider retail bonds.

“If markets are volatile, why save in a bank account? The interest rate is really low and a hefty chunk in bank charges can result in loss of capital. In my view, with favourable interest rates that will materialise and no costs, why wouldn’t anyone consider this type of investment?”  

Retail savings bonds are useful for medium-term savings for specific goals like children’s university fees or an expensive event like a wedding, she says. “When people are planning for these events they don’t necessarily want to expose their savings to any unforeseen risks and, given the constant market corrections, there is the very real risk that at the time of needing the funds this could happen. Under these circumstances one cannot wait for the market to recover and so this loss is locked in and can cause tremendous financial hardship,” Govender says.

Unfortunately, you can’t top up on your savings in a retail savings bond and the minimum investment amount is R1,000. You also aren’t able to save as a collective in a retail savings bond. 

But Msomi says Treasury plans to change all of this to allow for recurring investments and of smaller amounts, and to launch a tax-free retail savings bond this year. 

Until such time, younger investors should still take advantage of these investments, Govender says. “I see them as a stepping stone to entering the weird and wonderful world of investing. Once investors are comfortable and can see the magic of compound interest, they are psychologically ready for long-term investing.

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