A pensioner considers investing in RSA retail savings bonds but wants to know if it's worth the risk during the Covid-19 pandemic.
He writes:
I am a 78-year-old pensioner dependent on income from interest, which is very low at the moment. I am planning to invest money in RSA retail savings bonds, which offer 8% interest over a 5-year period. My question is, how safe is such an investment in light of the current financial position of the country and government? I will really appreciate it a lot if you can give me guidance in this respect.
Andre Tuck, Senior Investment Consultant at 10X Investments, responds:
An RSA Retail Savings Bond is an investment with the Government of South Africa that earns fixed or inflation-linked interest for the term of the investment. RSA Retail Savings Bonds are available as: Fixed Rate Retail Savings Bond series consisting of bonds with 2-year, 3-year and 5-year terms.
Government bonds have the following advantages:
- Risk is usually relatively low compared with equities, as interest and principal investment will be repaid provided the relevant governments do not default on their bonds.
- Bonds can be an excellent diversifier. They frequently perform well when other asset classes are doing badly.
- Bonds are liquid and early redemption is easy, as bonds are bought and sold on the open market every day.
Government bonds have the following disadvantages:
- The interest paid on bonds, the 'yield', can be low.
- Bonds can lose value on the open market if interest rate increase or inflation expectations rise. This is because higher interest rates or higher inflation make the fixed interest paid by bonds less attractive.
- Long-run returns tend to be lower than for riskier assets, such as equities and property. However, bond returns tend to exceed cash deposits over long periods.
- Bonds can be vulnerable if the government that issues them enters a fiscal crisis that raises doubts about whether debt obligations will be honoured.
- The risk is that the government is unable to pay you. They may default. Argentina defaulted on its debt in 2001. However, the South African government's finances are in better shape and the chances of this happening are very remote. Nevertheless, they do exist.
Inflation is currently running at 4% and is expected to remain low (at around 5% per annum) for the next year or two. This means your gross return on a two- or three-year bond is expected to be on par with long-term expectations of inflation plus 2-3%, but bear in mind that this is before taking any tax consequences into account.
Inflation is your enemy number one. As an investor, you need to ensure that your investments are at least keeping up with price increases. If inflation turns out to be higher than 11.5% (it is currently around 4%) this investment would "lose purchasing power". Again, that is unlikely to happen.
Overall, RSA Retail Savings Bonds can be a great investment, especially for retirees.
As to how you go about investing, see secure.rsaretailbonds.gov.za
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