Cash investments may seem like a safe option for investors. However, recent data shows that term deposit rates have fallen and are now below the inflation rate.
RBA data shows the average interest rate on term deposits was 3.4% in September. Meanwhile, the inflation rate remains at 3.8%.
The average interest rate on three-year term deposits was 3.6% in September, down from 3.8% in August and 4% at the beginning of the year.
Simon Arage, founder and director of private credit investment manager Vado Private, says cash is not as safe an investment as some believe and warns investors before going down this path. uttered.
“We are seeing government bond yields, and therefore market interest rates, fall sharply in response to falling interest rates in the US. However, Australian households and self-managed superannuation funds (SMSFs) remain a significant portion of wealth. is allocated to cash and term deposits,” Arazi said.
“For many investors, cash may seem like a safe investment. In reality, the real rate of return on many term deposits is currently below zero, and cash in the bank does not provide much for investors. It doesn’t provide a safe buffer. For this reason alone, Australian investors are scaling back cash investments at record levels and instead putting some of their money into high-yield fixed income investments such as private credit. , you may be able to earn higher profits.
“Major banks are now paying less on term deposits than they were at the beginning of the year. If this trend continues, average term deposit interest rates could fall below 3% by the end of the year.”
Household wealth rose 1.5% in the June quarter to a record $16.48 trillion, despite issues around inflation and rising costs of living.
Of this total, 10.4% or $1.72 trillion was cash and deposits. Meanwhile, real estate assets totaled $11.22 trillion as of June 30, 2024, according to Vado Private.
“Official household wealth data reveals that nearly 80% of Australians’ household wealth is now invested in low-yield residential property assets and cash savings; It would be wise to diversify into other asset classes to reduce asset risk.” Wealth is being eroded by inflation,” Arazi said.
“This is a very attractive return for investors. Private credit funds can provide stable and reliable income, with profits provided by corporate loans and real estate loans. Interest rates on such loans They typically have floating coupons or are linked to official interest rates, so they benefit from higher interest rates.Private credit is a good choice for income-seeking investors who are willing to take on more risk than cash or term deposits. Investments can provide investors with much higher yields.
“However, investors should assess their financial needs before investing in a new asset class. Private credit investing offers potential benefits such as high returns, flexibility, and diversification, and returns Very attractive compared to low cash investments. However, Australians should note that it may be difficult to convert these investments into cash quickly as private credit is less liquid than cash. This is a big difference compared to cash, but most Australians have room to increase their allocation to fixed income assets.
(Related: Small businesses warn of investment opportunities that are ‘too good to be true’)
Jack Campbell is the editor of Broker Daily. After graduating from the University of Wollongong in 2022, Jack began his journalistic career with Broker Daily’s sister brand, HR Leader. In August 2023, he was appointed news editor, writing articles and recording podcasts alongside several talented journalists.
To contact Jack, please email him at: This email address is being protected from spambots. JavaScript must be enabled to view.
