THE maximum rate for risk-free annual term deposits these days is about one-third of a per cent a year
The rate of inflation is currently 1.1 per cent. That means the real interest rate on your term deposit bond is minus 0.8 per cent.
Investing your money in term deposits actually costs you money. At the moment, a term deposit is only risk-free because it is an absolute certainty that you will lose money.
However, the fixed interest market is bigger than just bank term deposits.
For pensioners with savings from a few thousand dollars to a lot more to invest there are possibilities to get more than a third of 1 per cent, or minus 0.8 per cent after inflation
The Mutual Cash Term Deposits and Bank Bills Fund has averaged a return of 1.7 per cent over the last five years, for example. Make that 1.45 per cent after fees and 0.35 per cent after inflation.
The Schroder Fixed Income Fund, which also invests in bonds, about doubles that rate: 3.6 per cent, or 2.9 per cent after fees and 1.8 per cent after inflation.
The IOOF MultiMix Diversified Fixed Interest Trust, which invests in Australian and overseas bonds, scored 4.45 per cent, or 3.75 per cent after fees and 2.65 per cent after inflation
All these types of managed funds typically operate with a minimum investment amount of between $5,000 to $25,000.
An Australian start-up called Blossom is a bit different in that it operates with no minimum (or maximum) investment amount. It says it aims for 3 per cent, 2.5 per cent after fees, 1.4 per cent after inflation.
This post is not an endorsement for any of the funds mentioned (or not mentioned).
The point of this post is that by sticking with term deposits at the moment, you are sure to lose money because the rate of inflation is higher than the term deposit interest rate.
By investing in a fund, you are likely to get more than 1.1 per cent, the rate of inflation.
But risk remains.
The main risk of investing into government and corporate bonds is interest rates going up. For example, a $1,000 bond with a fixed interest rate of 3 per cent could only be sold for $971.70 if variable interest rates went up to 6 per cent. Add the 3 per cent ($30) fixed interest payment, and the bond-plus-interest is worth $1,001.70 on expiry, a return of 0.0017 per cent or minus 0.0093 per cent after inflation. Note that in this example it requires the variable interest rate to double, which won’t happen in a hurry.
But it’s also worth remembering that all the talk at the moment is about interest rates going up, not down. How soon is another matter, so there may still be a window of opportunity to beat term deposit rates.