In 2023 you could go to your bank and get a 12 month term deposit at 6%. Life hadn’t been so exciting for a conservative saver for years. After the super-low rates of 2020, and the volatility of 2022, even longer-term investors were tempted by such good returns for very low risk – even if just for a breather from volatility.
Today, the scene is changing. Inflation pressure has eased, and the RBNZ is now focused on nurturing New Zealand’s economic growth. Rate cuts are back on the agenda, with the market expecting further cuts to the OCR. (The Reserve Bank’s OCR, or official cash rate, sets bank interest rates, so term deposit rates tend to follow it up or down.)
Do lower rates mean it’s time up for term deposits?
Term deposits often have a place within a diversified wealth plan, but for most investors, relying on them as your whole investment strategy is likely not a good idea – especially as rates start falling.
Let’s look at that 12-month term deposit’s 6% return a little more closely. Assuming a flat 33% tax rate your net return is already down to 4%. When you subtract inflation at the September 2024 rate of 2.2%, you’re left with a much skinnier 1.8% net real return.
So if you stockpiled cash in a higher rate term deposit, what’s your next step?
Managed funds offer the potential for higher returns over the long term
Investing in a more widely diversified managed fund carries more risk than a term deposit. That means you’ll see bigger ups and downs, and you can expect to pay a fee to manage your investment. However, managed funds can provide higher returns over the long-term and have historically done a better job at holding their own against inflation. For many people this makes them a compelling option for their long-term growth ambitions. Falling interest rates make it increasingly important to consider adding growth assets like shares and property to your portfolio, to help preserve your money’s purchasing power. Even without the greater return potential, managed funds have other benefits:
Managed funds may mean less tax. Managed funds operate in the PIE tax system with a maximum PIE tax rate of only 28%. For higher income earners this can make a big difference, given the top income tax rate is 39%. PIE tax is managed within the funds and generally investors do not have to complete a tax return to declare additional income.
Managed funds don’t tie up your money. While our managed funds all have a recommended investment timeframe, they don’t have fixed terms or break fees. That means you can use them as a source of regular income payments, or take out some or all of your money if you need it. It’s worth keeping in mind that some managed funds have minimum withdrawal amounts and while Fisher Funds Managed Funds currently don’t have withdrawal fees, some do.
Managed funds are simple. The clue is in the name. Our managed funds have our own portfolio management team researching investments and making investment selections on your behalf. This takes away the stress of researching and managing your own portfolio, or making reinvestment decisions every time your term deposits mature.
Choose your own level of risk with our Managed Funds
Fisher Funds Managed Funds have a range of different investment options. From our single-sector options for a more focused investment, to our diversified strategies with a mix of assets, including cash, fixed income, shares and property. That means you can choose the level of risk you’re most comfortable with.
If you’re cautious, or you’ll need your funds in a shorter timeframe, take a look at our Income Fund. It invests in a diversified basket of local and international fixed income investments. As a result it is lower risk than some of our other funds, while giving you returns that are potentially better than term deposit rates and taxed at the potentially lower PIE rates.
If you have a longer time frame, you could consider adding growth assets, like shares and property. For example, our Balanced Strategy allocates 40% of your money to our lower risk Conservative Fund, and the rest of your money to our Growth Fund. We recommend at least a five year timeframe for this strategy. Over the past year, investors have been rewarded for taking on some additional risk with strong returns, against a backdrop of higher interest rates.
Let’s explore your options together
While we’ve been talking about general principles, your situation, objectives and attitude to risk is unique. It definitely deserves its own conversation. Before rolling over a term deposit, it makes sense to look at all of your options before locking your funds into what could be a cycle of declining deposit rates for the foreseeable future.
Get in touch with our team of experts. We’d love to hear from you, and see what we could do to help meet your investment goals: not just for the next 12 months, but for well into the future.
