Investment insights: Maximising interest returns

Navigating the trade-off between liquidity and return.

Investors with a more short-term or undefined investment horizon often leave their money in a bank deposit of some sort.

Interest rates have been rising during 2022, making bank investments more attractive than they were in the past 12 to 24 months. The key challenge for these investors is navigating the trade-off that comes with investing money in the bank: yield (interest) vs liquidity.

How does the yield vs liquidity trade-off work?

Banks pay you a higher interest for accepting less access to your capital. When you invest in a bank call account, the interest rate is lower than when you invest in a bank notice deposit. Notice deposits in turn do not offer as much interest as fixed deposits.

The most popular notice deposit is a 32-day notice account which offers a higher interest rate than a call account, where the funds are available immediately or within 24 hours. Standard Bank currently offers interest of 4.8% for a 3-month fixed deposit, compared to 7.01% for a 12-month fixed deposit (for an investment of between R100 000 and R500 000).

Liquidity refers to how long you have to wait to get access to your money. The reason that banks offer higher interest rates for lower liquidity is that it allows the bank time to lend those funds out and earn a higher return. If all the funds invested in the bank were at call rates, then the bank would be limited in its ability to lend money out.

The other variable that impacts on the amount of interest a person can earn at the bank is the amount of money they will be investing. Investors with larger amounts earn higher interest rates than those with smaller amounts, even though they have the same liquidity.

Extending the Standard Bank example above; an investor with R5 million can earn 5.1% for a 3-month fixed deposit, and 7.05% for a 12-month fixed deposit. As one can see, this variable is not as powerful as liquidity where interest rates increase dramatically for the same investment amount, as liquidity reduces.

What alternatives are available to investors?

Investors who need to prioritise liquidity can consider the Corporate Cash Management offering we have in place with two of the ‘big 5’ South African banks. The rate is currently at 6.16% p.a. and will increase if interest rates increase. The funds are available within 24 hours, and we have several examples of where funds cleared in the client’s account on the same day as the paperwork was submitted for the withdrawal. Returns are the same irrespective of the amount invested, and the rate is net of a 0.30% administration fee.

The next option for investors is that of a unit trust money market fund. The cheapest fund available to our clients is the Allan Gray money market fund, which levies an annual management fee of 0.25% (plus VAT). The adviser service charge is also 0.25% for cash management solutions.

The latest 7-day rolling yield for investors is 6.55%, and is the same irrespective of the amount invested. Withdrawals can take up to 5 working days for funds to clear in the client’s account after a withdrawal instruction is submitted.

The above two investments are suitable for individuals, organisations, companies, and trusts.

An investment option with similar liquidity to money market investments is that of income and enhanced income funds.

Income funds offer a higher yield than money market, and they seek to protect capital over 1-month periods. This higher yield is because they also invest in bonds.

Bonds are different to money market investments in that they can experience a capital loss. The size of the loss is determined by the maturity of the bond. A bond that is close to maturing has very low capital volatility, but can be offering a higher yield than cash. This makes them attractive for those seeking yield and capital security.

The forward yield (expected interest to be earned over the coming year) is 6.88% for the Old Mutual Income fund. The return to the investor will however be different to this based on capital movements over the period.

Enhanced income funds look to maximise yield and pay less attention to capital protection compared to income funds. These funds typically look to protect capital over 3-month periods.

By increasing the term over which they protect capital, they can invest in bonds with longer maturities, and therefore higher yield. Investors who are chasing yield and can stomach some short-term capital fluctuation will therefore find these funds attractive.

The Gradidge-Mahura Income model portfolio is invested in several of these funds and has a forward yield of 9.23% as at the end of September 2022. The return to the investor could be higher or lower than this based on capital movements over the period.

The historical performance of the AG Money Market, OM Income and GM Income model shows that when interest is reinvested, investors have been rewarded for taking on additional risk over time.


Craig Gradidge is an investment and retirement planning specialist at GradidgeMahura Investments.


While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes and should not be construed as financial advice.

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