People who rely on fixed deposits will watch with horror as fixed deposit interest rates decline. As Mark Patton of Stuart Carlyon Financial Advisors points out, their incomes have fallen, but at the same time inflation has also fallen, easing some fiscal pressure. Patton added that what matters in the long run is the return on investment after inflation.
There is an argument that it is unwise to rely on fixed deposits over the long term, which are depleted by inflation. Your financial advisor will suggest a variety of other investments as part of a diversified portfolio. For example, newly retired people almost always need to leave some of their savings in growth investments.
People who are still interested in fixed deposits and are looking for higher returns have a variety of options, and it would be beneficial to consider different options.
For example, your main bank may not always offer the best interest rate on term deposits. If it’s a big deposit for you, comparison sites like Interest.co.nz can help you identify alternatives. This can include a variety of providers, including lesser-known banks such as Co-operative Bank, ICBC, Bank of China, Heartland Bank, and SBS Bank. Always check your credit rating. The lower the rating, the greater the risk.
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Alternatively, it could be an alternative to fixed deposits, such as a Notice Savings Account. Notice savings accounts continue to earn interest as long as your money is deposited. Savers must give notice, such as 32 days or 90 days, when they want their money back. The three main banks currently offering Notice Savings Accounts are Heartland Bank, Kiwibank and Rabobank, and at the time of writing the highest interest rates on Notice Savings were 5.5%, 5.1% and 5.15%.
Patton said the real problem with term deposits and notified savings accounts is “liquidity,” or the ability to withdraw money when you need it. It is effective to use term deposits that divide the funds into multiple periods with different maturity dates.
Many fund managers, such as Booster, Kernel and Sharesies, offer savings accounts that offer instant access and often offer higher returns than bank term deposits. The returns on these “bank-like” accounts are not fixed and can rise or fall depending on economic conditions. Many digital disruptors are also active in this space and offer higher interest rates. I wrote about this phenomenon at Tinyurl.com/NZHdisruptors.
Those who pay income tax of 28% or more should consider choosing the PIE version of term deposits, notice savings and other investments. For example, most banks offer a PIE version of term deposits. The difference is that your returns are higher because your tax rate is lower.
Financial advisors often steer clients away from fixed deposits and into other lower-risk investments such as bonds, bond funds, cash and income funds.
Joe Bloggs DIY investors often don’t understand or know about bonds. Patton says that when you buy a bond, you’re essentially lending money to a company or government, and you get paid a return on your investment, similar to interest. These are a bit complicated because the value of bonds can go up and down. A bond fund is a fund that diversifies risk by holding multiple different bonds.
Financial advisors may recommend cash/income managed funds to their clients. These have some similarities to defensive or conservative KiwiSaver funds. Cash funds invest primarily in term deposits, bonds, and other low-risk fixed-rate investments and can be withdrawn at will. Funds are able to negotiate more favorable interest rates, which typically result in returns that are slightly higher than what investors can put in their banks.
The trick here is to understand what exactly the fund is investing in, Patton said. Some funds have riskier assets inside than others, but their descriptions can be very similar.
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“It’s not just about looking at returns,” he said. “Are you taking on some kind of risk to make it look like the dividend is guaranteed?”
This isn’t the first time a risky investment has been sold as safe. Just ask the investors who put money into Du Val over the past few years or the investors who put money into Hanover Finance in the run-up to the global financial crisis.
