How can I maximise R2.5m while protecting the capital?

Dear reader,

From your question, we can determine that your three main considerations for your available cash would be access (liquidity), income and capital protection. Depending on your need for access to the funds, you are already thinking along the appropriate lines of money market, fixed deposit, or bond holdings. However, understanding the subtle differences between these three options can be useful.

Money market

Typically, money market accounts are highly liquid, often same-day withdrawals, and offer a reasonable interest income while being as near as can be to capital guaranteed. However, the interest rates usually would yield, at best, a figure in and around inflation once taxation on the interest is accounted for.

Read: Money market funds and accounts: Different in nature and purpose

Fixed deposit

Depending on the committed term of the fixed deposit, the interest rates will vary from slightly above money markets to well above them the longer the term of the deposit. Again, your capital is essentially guaranteed, with your only real risk of loss being if the financial institution had to collapse during the term. Liquidity would be your true challenge here since there could be limited to no access to the funds within the committed term unless you can withstand incurring a penalty or fee for early access to the funds.

Read: Best fixed deposit rates in SA in 2023

Bonds

When investing in bonds, you usually have to utilise a unitised fund, such as an income or bond unit trust fund, which would invest your monies into bonds or other fixed interest instruments within the fund mandate. Over time, you would expect a great return yield from such funds compared to money market or fixed deposits, while discretionary unit trust funds are fully liquid. However, there is usually a settlement period of approximately three to seven working days, depending on the investment platform, for any withdrawals to be paid back to the investor.

Read: Where can I buy government or other bonds?

Pay off outstanding debt

You also mention that you could consider settling the outstanding debt on your rental properties. With interest rates at such high levels, this could certainly be a valuable option. However, it would then contradict one of your objectives, being liquidity. Should you settle any of these bonds, you would then be committing your cash to the physical property, and your cash flow would then be limited to the monthly rental yield.

Read/listen: Paying off your bond vs investing: What to consider

You could, of course, apply to re-bond the property in the future to access cash; however, this would incur additional costs. Ideally, you could ‘park’ the cash in these bonds without fully settling them to save on the interest on repayments until you possibly need the funds in the future. However, this option relies on the fact that these are access bonds, which would enable you to move the funds in and out of the facility.

Tax implications

Lastly, be mindful of the tax implications of your investment decisions. If we assume that you are under 65, then the annual interest income exemption of R23 800 equates to a little less than a 1% interest return in the tax year on a balance of R2.5 million. Therefore, the interest earnings above this amount, or above R34 500 should you be over 65, would be included in your taxable income and taxed at your marginal rate.

Read: Tax on investments: Answers to commonly asked questions