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Savings – Saving for the medium term

Savings – Saving for the medium term

Take-home message: When saving for the medium term, it’s better to invest in a unit trust instead of a savings account.

Right, you are contributing towards retirement and emergency funds. So what’s next? Perhaps saving for something big like a new car or a deposit on a house. When saving for the medium term, say five to seven years, it’s better to invest in a unit trust instead of a savings account. Here’s why:

When you save money in a savings account with a bank, your interest is guaranteed. The interest rate typically varies between 3% and 8%, but you know exactly how much your money will be worth after 12 months, two years, or a decade. There is very little risk involved, but your returns are capped.

When you save or invest your money in a unit trust, it means you’re putting your money together with other people’s money to buy lots of different things, like shares and property (also called asset classes).

Each of these classes has risks and rewards. For example, a unit trust called a balanced fund might have some money invested in shares, some in bonds, and some in property. This can be good because if one of the underlying investments doesn’t do well and loses money, you won’t lose all of your money.

Another reason a unit trust is a good option to save for the medium to long term is because the returns generated over time can potentially outperform inflation.

Ata wants to know…

Do banks have unit trust accounts?

Some banks do, but usually unit trusts are managed by investment companies. Each unit trust fund is managed by a fund manager, someone who knows a lot about investing. The fund manager buys and sells the different underlying investments in order to grow your investments. The investment returns are usually measured against a benchmark, like the Consumer Price Index, to measure their performance relative to inflation.


Did you know?….

When you save money in a savings account, you are guaranteed a fixed interest rate, which typically ranges from 3 % for a savings account to 8% per year on a 32-day fixed deposit account (if the money remains invested for 12 months).

The value of a unit trust can go up or down, depending on the performance of the underlying investments. Historically, some unit trusts have achieved an average annual return of around 8% to 10% over the long term. But it could also be between 3% and 4% because of market downturns or lack of diversification. It’s important to know that when you invest your money in a unit trust, there is no guarantee that you will make more money or that you won’t lose any of the money you invest.

Thando saves R10 000 in a 32-day fixed deposit account for five years. After five years the money will be worth R14 356,30.

If Thando saved the R10 000 in a unit trust she might, depending on the economic environment, have much more than R14 356,30 – or less – after five years.

Before you decide to invest in a unit trust, talk to a financial adviser. This is someone who knows a lot about money and investing and should be licensed by the regulator, the FSCA.  He or she can help you figure out how much risk you’re comfortable taking and suggest a fund that might be a good fit for what you want to do with your money.

Questions to ask when choosing a unit trust:

Fees? All unit trusts charge fees, and it’s important to understand these fees. They may include an initial fee, a monthly/annual management fee, and a performance fee. Compare fees across different funds to determine which fund offers the best value.

Risk profile? Choose a unit trust that matches your level of risk tolerance. If you go for a higher-risk unit trust, you may earn more money, but the value of your investment may go up and down more often. If you choose a lower-risk fund, your investment will likely grow more slowly, but you can expect more stable returns over time.

Past performance? Past performance is not a guarantee of future performance, but it can provide some insight. Look for unit trusts with a consistent track record of strong performance over the long term. Ask the fund manager how the fund has performed in comparison with inflation.

Investment minimums? Some unit trusts require a minimum investment amount, which can range from R500 per month to a lump sum of R20 000. Make sure you choose a fund that has a minimum investment amount you can afford.