Why income and interest funds are appealing to investors

Allan Gray Income and Interest Funds deliver returns of 12.8% and 10.9% respectively following 2024 launch. 

Even amid a rate-cutting cycle, investors continue to view income- and interest-bearing funds as safe havens given the political and economic uncertainty being felt locally and abroad. Allan Gray’s Vuyo Mroxiso explains the appeal of these funds.

The Reserve Bank’s decision in July to drop the repo rate by 25 basis points is evidence that its efforts to tame inflation are bearing fruit. The repo rate has decreased from 8.5% at the start of the year to its current level of 7.0%.

“While lower rates can typically reduce the appeal of interest- and income-bearing funds, which invest in money-market instruments and bonds, we’re seeing a more nuanced picture in the current environment where this is not actually the case,” says Vuyo Mroxiso, Manager in the Retail Product Development team at Allan Gray.

Heightened risk makes investors seek refuge in interest-bearing funds
According to recent Morningstar data, there have been strong inflows into money-market and income funds over the past year. Local interest bearing portfolios attracted R29 billion in net inflows over the first quarter of 2025 and R52 billion over the preceding 12 months, Moonstone reports.

“Investors remain wary of volatility in global markets, geopolitical unpredictability and sluggish domestic growth,” comments Mroxiso. “The fact that income- and interest-bearing funds continue to attract strong inflows shows investors value liquidity, capital preservation and a steady income.”

In addition, these funds offer low risk and capital stability, especially among retirees or those with short- to medium-term savings goals. “Even with the repo rate at its lowest since November 2022, current yields remain attractive relative to inflation,” she says. “With the June print showing headline inflation at 3% and core at 2.9%, many fixed-income funds still offer real, inflation-beating returns.”

Stellar performance of Interest and Income Funds
Evidence of these impressive returns is seen in two young funds, the Allan Gray Interest Fund and Allan Gray Income Fund. “Since their inception last year, the Interest Fund has posted an annualised return of 10.9%, with the Income Fund delivering 12.8%,” asserts Mroxiso. “Both funds are attractive in that they offer higher returns than traditional money market funds, but still focus on capital preservation and stability.”

The Allan Gray Interest Fund is ideal for conservative investors who want steady income without taking on excessive risk. The fund focuses on shorter-duration assets, such as domestic interest-bearing securities issued by government, parastatals, corporates and banks.

“This fund is well-suited for investors who prefer a low-risk option with consistent income, such as retirees who need to preserve their savings, while covering short-term financial needs,” explains Mroxiso. Investors in this fund should have a short-term horizon, typically between six months and one year.

For those willing to take on slightly more risk for potentially better returns, the Allan Gray Income Fund offers a broader range of investment options, including offshore instruments and some exposure to equities and property. “This fund is designed for investors with a medium-term outlook who want to earn more than they would in a money market fund, without being exposed to unnecessary risk,” she says. The recommended investment period is one to two years, making it a solid option for those looking to grow their capital and generate income at the same time.

With a strong focus on wealth protection and managing risks, short-term interest-bearing funds provide individual investors with a reliable way to achieve their financial goals in uncertain times.

“Both funds reflect our long-term philosophy of balancing capital preservation, income generation and disciplined risk management. They provide stability and meaningful returns to help investors achieve both their short- and long-term investment objectives,” Mroxiso concludes.