"Interest rates are declining in South Africa, driven by abating inflation and the impact of worldwide economic turmoil. This is having a negative effect on savings and investments as returns are decreasing," says Robert Keip, head of Savings and Investment at First National Bank.

A question is always raised, what is the best interest rate or return that I can currently get on my savings or investments?

A common mistake that investors make is comparing interest rates on various investment products on the day of investment instead of over the investment period taking into account expected future interest rate movements.

Take into account future rate movements

Investors need to evaluate their investments over the likely investment period and take into account how future rate movements may impact on their returns. Cash investments are proving to be safe havens in these times of turmoil, says Keip.

Keip uses the following example:

The current top rate for FNB’s Money Market on balances over R100 000 is 7.9 percent. Compare this to the FNB seniors 12 month Fixed Deposit of 7.3 percent on balances between R10 0000 and R250 000. At first glance the money market option seams to the best option. But is it?

Market expectations are that the South African Reserve Bank will reduce interest rates by 100 basis points at each of its next three Monetary Policy Committee meetings with a further possible reduction of 0.5 percent after that. Keip reminds investors that the repo rate is currently at 10.5 percent and — considering that the repo rate was at seven percent in June 2006 — the market's expectation of a further 3.5 percent reduction in rates may not be too far fetched.

Money market rates to drop to 5.9%

Money market rates may drop to low levels of 5.9 percent as soon as August this year. Should this happen the investor will have lost out on an opportunity to have locked in an investment at the current 7.3 percent per annum on a 12-month fixed deposit.

Investors who are living on their interest income, and are uncertain as to whether interest rates will hold up, should 'lock-in' their returns and gain some of the certainty they desire, Keip said.