MAXIMISING INTEREST RETURNS

Navigating the trade-off between liquidity and return

-  CRAIG GRADIDGE

INVESTORS WITH a more short-term or undefined investment horison 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 tradeoff 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.