Retail notes - an easy investment option for new investors

Being a newbie in the world of investing can be challenging because you don’t know where and how to invest. With so many investment options, you could easily be befuddled.  

Justmoney looks at how retail notes can help you cut your teeth in the world of investing.   

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What are retail notes?

Retail notes, also known as retail bonds, are unsecured loans issued by investors to the government or a corporation for a return. In South Africa, we have two kinds of retail notes: Retail Savings Bonds and Exchange-Traded Notes.

Retail Savings Bonds

Retail savings bonds are investment products that offer you (the investor) the ability to invest in the South African government with the benefit of the original investment amount, guaranteed. The government offers two types of Retail Savings Bonds:  Fixed Rate Retail Savings Bonds and Inflation-linked Retail Savings Bonds.

Fixed Retail Savings Bonds offer you the ability to invest for two, three, or five years at a fixed interest rate, says Adele Hattingh, business development and exchange-traded products manager at the Johannesburg Stock Exchange. 

On the other hand, Inflation-linked Retail Savings Bonds offer you the ability to invest for three, five, or 10 years at an interest rate linked to the inflation rate.

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Exchange-Traded Notes

Other retail notes include Exchange-Traded Notes (ETNs) which are also unsecured loans that give investors access to a wide range of asset returns.

The investor lends money to the issuer of the ETN, usually a bank, and then receives a return based on the performance of a specific benchmark or asset after a certain period, plus the investors’ original investment amount, usually after five years when it matures, says Hattingh.

However, because ETNs trade on the exchange, they can be bought and sold any time on the secondary market.  Investors can therefore also make a profit from the difference between the price they paid for the ETN and the price they sold it at.

Underlying benchmarks or assets can be based on the performance of interest rates, commodity prices, a basket of shares or bonds or a currency. To put it simply, if you had bought an oil ETN, your investment is based on how well the oil price has performed.

What are the advantages of investing in retail notes?

RSA Retail Savings Bonds

Retail Savings Bonds offer you an easy and cost-effective way of saving money with the benefit of a guaranteed return. 

“There are no charges, commissions, or costs. Interest rate payments are made to you every six months.” 

The fixed interest rate return is guaranteed and will be not affected by changing interest rates. The inflation-linked RSA Savings bonds are also shielded against inflation over the term of your investment.

Moreover, the minimum investment amount for Retail Savings Bonds is R1,000 which makes it more accessible to low-income investors.

Exchange-Traded Notes

ETNs offer you a cost-effective way of investing in different asset classes, both locally and globally. Investors are also allowed to invest using the local currency.

They come in handy if you want to diversify your portfolio.

What are the disadvantages?

RSA Retail Savings Bonds

To reap the benefit of the guaranteed return on the RSA Retail Savings Bond, investors are required to keep their money invested for the duration of the investment period, says Hattingh.

Penalties could be imposed if you withdraw your investment before the bond reaches its end term or matures, particularly within 12 months of the purchase of the bond. 

“The investor may withdraw from the capital invested after 12 months, but the balance must not be less than R1,000 after withdrawal,” says Hattingh.

Exchange-Traded Notes

To obtain the performance of the ETN’s underlying asset and the original investment amount, investors are required to keep their money invested for the duration of the ETNs’ life, which is typically five years.

In addition to this, ETNs are subject to the same market risks as the underlying assets they track and will be exposed to the same day-to-day price fluctuations.  

When an investor buys an ETN, the issuer promises to pay the amount reflected in the index, minus fees, upon maturity, says Hattingh.

An ETN holds counterparty risk, that is if the issuer of the ETN is unable to repay the initial investment to the investor, the investment could lose its value.

How do you purchase retail notes?

If you want to purchase Retail Savings Bonds, open an account on the RSA Retail Savings Bonds website or visit your nearest SA Post Office or Pick n Pay. For ETNs, you will need to open a brokerage account with a JSE Equity Market member or use a platform offered by a financial services provider (FSP) such as banks that allows you to buy ETN products from different issuers.

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