Despite the fact that due to a low inflationary environment, guarantee investments may not potentially outperform linked investments due to the market volatility of recent, more individuals are seeking certainty of return. I will briefly identify a few of the basics that one should take into consideration as the information supplied from one institute to the next is sometimes confusing or even deliberately misleading.
When a guarantee option is considered, it is beneficial to determine if the initial capital is guaranteed or the return or both? Be very weary of the difference between estimated projections opposed to an actual guaranteed return. When rates are supplied also ask if the rate for drawing the interest is the same as the rate used if the interest is reinvested, as this may sometimes differ.
Be cautious when comparing rates from one establishment to another as you need to ensure you are matching ‘apples for apples.’
To do so, query if the rates provided are nominal or effective. In other words is it simple interest e.g. R1million calculated with simple interest of eight percent is R1.4million at maturity. However, R1million compounded annually at eight percent is R1 469 328 at maturity.
If it is compound interest, is it compounded annually or monthly? E.g. R1mill compounded annually is R1 469 328 but compounded monthly is R1, 489,845. To simplify the matter, perhaps you should determine what the final figure will be at maturity?
However bear in mind rates are only valid for a stipulated period. Also consider the real rate of return, in other words what is your actual return ‘after’ inflation.
For this reason it would be in your best interest to look around so that you are able to potentially secure the most satisfactory rate. Remember a bank or insurance institute will is only able to offer you their specific product.
Shop around or seek the services of an advisor who has access to as many bank and insurance rates possible so that you can make an informed decision. Also, it is essential that that all fees and potential penalty clauses as well as the term of the investment is fully disclosed.
