Short term interest

I intend to buy a property in six months time. I will be financing about half the required capital from personal funds with the balance being funded by way of a loan. The amount I will be investing in the project is Lm30,000, which is currently held on deposit. This is earning approximately 2.6% per annum interest. My bank is suggesting that I buy bonds with the sum as they will give me a higher rate of interest than that earned if I leave them in cash. Should I take their advice bearing in mind the short length of time till I will need the funds?

As you expect to need the capital in only six months, my general view is that this is far too short a time to be making any investment commitment. You must bear in mind that the value of any investment can fall as well as rise, unless there is a stipulated guarantee built in.

The capital value of an individual bond is only guaranteed on the maturity date. The price will therefore rise and fall in the interim period. Such fluctuations will depend mainly on interest rates and the security of the bond in question. If you buy one or more bonds you must be aware that the value after only six months could be higher or lower than the purchase price.

The suggestion to buy bonds is still a valid recommendation as your bank is clearly trying to help you in that the rate of interest from most, if not all, local bonds would yield a higher return than cash deposits.

There is, however, still a risk involved, as I have just explained, and only you can decide whether to take such a risk, bearing in mind the very short term that you would hold any bond(s) for.

You must also take into account the cost of arranging such a purchase, i.e. the stockbroking fees. You must therefore deduct any fees from the likely interest received from the bond to give you a 'real rate of return'. You will not for example receive any 'discount' if you were only holding the bond(s) for six months!

My general opinion is therefore to hold the sum on deposit. If you can give a commitment to your bank of not accessing the funds for six months, you should be able to arrange a better rate of interest for a six-month deposit compared to what you receive at the moment.

Should you however need access within that time, i.e. the purchase date of the property moves forward, then there may be penalties involved. I suggest you therefore discuss all your options with the bank. You may get an even better rate if you arrange the loan through them.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com.

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Malta exchange control regulations must be observed. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.