Short term investment

[Friedpet]

I'm looking at starting a short term investment at either Standard bank or FNB. I only want to save for 12 months and I plan to put away R2000 per month.

Now, I can't remember anything of my grade 12 additional maths classes and need some help!

Which will have the biggest growth over 12 months:

3.75% calculated on a daily balance and paid monthly

or

3.75% capitalized annually to the account, calculated on the average balance for the year?

Somehow I think the first option will yield slightly better results, even though it might be negligible...

 

[HavocXphere]

Yes first.

Difference will be minor though - go with whatever is more convenient/less fees.

EDIT: Assumption being by "paid monthly" they also mean capitalized to a/c. I assume the 1st is SB, so they'd give you a choice on paid out or capitalized.

 

[netcruiser]

Using the first one you should get effective 3.815% p.a.

 

[Die_Miek]

rather go to capitec, they give more interest. 5% on a normal savings account,and a bit more of you fix the investment for a longer period.

 

[HavocXphere]

Using the first one you should get effective 3.815% p.a.

afaik banks only advertise effective rates, so not 3.815%.

 

[Hendrix]

Are you willing to take a little risk?
Look at a bond fund, like Allan Grays, it should return over 10%.
Or even Money Market through an asset manager, Banks tend to give bad deals.
Just my 2cents...

 

[ClintZA]

They should really advertise those as "effective rates" of -1.75% considering an inflation forecast of around 5.5% for the year.




PS I'm aware that is referred to as real return, I merely felt the need to play on the word effective.

 

[netcruiser]

afaik banks only advertise effective rates, so not 3.815%.

I'm making the same assumption you did, the interest is capitalised monthly into the account. In which case, the 3.75% is not the effective rate. AFAIK, SA banks are not forced to quote effective rate like they have to in the UK.

 

[HavocXphere]

I'm making the same assumption you did, the interest is capitalised monthly into the account.

No you are not. I'm assuming the capitalization is monthly, you are assuming the rate shown is a nominal rate. Two very different concepts. Its common practice that the capitalization period and the rate period differ - in fact they usually are different.

SA banks are not forced to quote effective rate like they have to in the UK.

Show me an SA bank that quotes nominal rates...

 

[DJ...]

Show me an SA bank that quotes nominal rates...

Can't provide examples off the top of my head but there is no law stating that only effective rates must be quoted to the best of my knowledge. They will specify between NACA and NACM though and I'm quite certain you'll find quite a few investments being quoted at nominal rates. While I can't find any references to it, there was a 702 show on this a few year's back in a word on finance where they gave a few money-market examples...

 

[HavocXphere]

Can't provide examples off the top of my head but there is no law stating that only effective rates must be quoted to the best of my knowledge. They will specify between NACA and NACM though and I'm quite certain you'll find quite a few investments being quoted at nominal rates. While I can't find any references to it, there was a 702 show on this a few year's back in a word on finance where they gave a few money-market examples...

MM? Perhaps - that would understate the return - why would a bank do that? Its all back to front & I don't buy it tbh.

On the debt side, it strikes me as unlikely that any SA bank would risk an endless torrent of deceptive practices accusations & PR for that extra 0.1%.

Best I could find is SB quote both side by side:
http://www.standardbank.co.za/porta...toid=a71908f82045b210VgnVCM100000c509600aRCRD

But still, original challenge stands: SA bank quoting nominal rates. Though if you'll permit, I'll make two refinements: Has to be consumer product & side by side doesn't count.

Somewhat OT: Yes no law, but the NCA apparently specifies some kind of hybrid formula though that is neither nominal nor effective - except I can't find it it the act. Anybody know the details?
link ftw http://www.ncr.org.za/pdfs/NATIONAL_CREDIT_ACT.pdf

 

[Ou grote]

Look at the bank charges - that's where you get nailed.


I'd also go capitec short term if you're super risk averse.

 

[netcruiser]

No you are not. I'm assuming the capitalization is monthly, you are assuming the rate shown is a nominal rate. Two very different concepts. Its common practice that the capitalization period and the rate period differ - in fact they usually are different.

The effective return will be the same if you re-invest monthly or if they had quoted nominal rate.

Yes first.

Difference will be minor though

You're contradicting yourself. They can't have both the same and different returns. If they both were effective rates and not nominal rates, then the return would be the same (that's what effective rate means).

 

[spiderz]

Also look into a Virgin Credit card. They have no monthly fees and a good interest rate.

 

[Friedpet]

Yes first.

Difference will be minor though - go with whatever is more convenient/less fees.

We went with the FNB one. I like the fact that I can sit at home and open the investment and also transfer money into the investment in the comfort of my own home. I had an investment at Standard Bank before and the trouble you have to go through just to put more money in....or to get the money after the maturity date...

Are you willing to take a little risk?
Look at a bond fund, like Allan Grays, it should return over 10%.
Or even Money Market through an asset manager, Banks tend to give bad deals.
Just my 2cents...

I agree with you, I remember the good old days when I got 10%+ on my investments. I'm definitely looking at Allan Gray, but rather for longer term, not for 12 months only.

Look at the bank charges - that's where you get nailed.


I'd also go capitec short term if you're super risk averse.

Luckily both these products are "free". I'm new to FNB so can't comment on that, but I have been charged for the Contract Save from SB before (own fault I guess).

I'd rather have my investment at the bank where I have an account, otherwise banks usually add additional costs?

Also look into a Virgin Credit card. They have no monthly fees and a good interest rate.

Never heard about that. Let me Google...

Thank you for all the input guys!

 

[Rkootknir]

But still, original challenge stands: SA bank quoting nominal rates. Though if you'll permit, I'll make two refinements: Has to be consumer product & side by side doesn't count.

Here's one:

Absa Investment Advantage (It's a instant access money market account). Currently quoted interest rate is 4.5%. Interest is calculated daily and capitalised monthly on the 1st.

e.g. On 1 January 2013 you have R100 000. Assuming no transactions occur during January you will receive R382.19 interest on 1 February 2013. (100 000*31/365*0.045). So on 1 February you have R100 382.19 and on 1 March you'll get R346.52 (100 382.19*28/365*0.045).

So, your effective annual rate of interest is actually about 4.59% using the standard (1+0.045/12)^12-1 formula - but not precisely due to the capitalisations not happening on 1/12 fractions of the year but instead depending on the actual number of days in each month.

Absa's homeloans and Wesbank's vehicle finance work on precisely the same basis - rates quoted are nominal annual with interest calculated daily and capitalised monthly.

EDIT: The loans are the real reason they do it. If they quoted effective rates it would look unattractive due to the effective rates being higher than the nominal ones. AFAIK there is some guidance \ legislation that requires them to be consistent and that's why they also quote the "unattractive" nominal rate on investments.

 

[Ekstasis]

I heard Sanlam has a product giving eight%

 

[HavocXphere]

Here's one:

Absa Investment Advantage (It's a instant access money market account). Currently quoted interest rate is 4.5%. Interest is calculated daily and capitalised monthly on the 1st.

It doesn't say whether its nominal or effective so we can't really know. They seem mighty reluctant to specify it either way (entire fees/rates guide doesn't mention either of them), which indirectly supports your view that it is design to understate debt rates.

Absa's homeloans and Wesbank's vehicle finance work on precisely the same basis - rates quoted are nominal annual with interest calculated daily and capitalised monthly.

Did you recalculate it to find out or how do you know? Again, I don't see them specifying it either way, so without recalculation we don't know. Not that I'm saying you should recalc it...way to much hassle than its worth...just curious why you are convinced its nominal.

You're contradicting yourself.

In a post I made before I realized & pointed out it has to be effective...

I suppose I could got back and check all my old posts for consistence vs the current state of the conversation - but why bother when I've gotten you to do so for me?

 

[Rkootknir]

It doesn't say whether its nominal or effective so we can't really know. They seem mighty reluctant to specify it either way (entire fees/rates guide doesn't mention either of them), which indirectly supports your view that it is design to understate debt rates.

Did you recalculate it to find out or how do you know? Again, I don't see them specifying it either way, so without recalculation we don't know. Not that I'm saying you should recalc it...way to much hassle than its worth...just curious why you are convinced its nominal.

I have one of each of the accounts mentioned. I'm one of those anal people that check up if the bank has done their interest calculations correctly on a monthly basis. So yes, for those 3 products (money mkt and the two loans) it definitely is the case that the interest rates quoted are nominal.

 

[HavocXphere]

I have one of each of the accounts mentioned. I'm one of those anal people that check up if the bank has done their interest calculations correctly on a monthly basis. So yes, for those 3 products (money mkt and the two loans) it definitely is the case that the interest rates quoted are nominal.

I'll take your word for it. Still - colour me surprised.