Many people saving for a first home or retirement might be looking at their interest gains and thinking, this is pathetic.
This week Mary Holm discusses low-risk funds, which she says are a good alternative to bank term deposits which currently have very low rates of return.
She tells Jesse Mulligan that people with money in bank term deposits are either planning to spend their money soon or are very risk adverse.
“In either case, you might therefore be willing to go into something that’s a little bit riskier for a little bit higher return.”
Holm says bank term deposits are popular because they’re simple, easy to understand and relatively safe.
“But their interest rates are just pathetic now. For a while I was saying, at least they’re ahead of inflation, at least people aren’t going backwards, but that’s not true anymore.”
The alternative is to get into a managed fund, or for over-65s putting their money into KiwiSaver. She says risk adverse people can go into what are called ‘defensive funds’ which have under 10 percent growth assets or none at all.
“Most of their investments are in bank term deposits just like the one’s we’re shunning here, but the big institutions can probably get a better deal on bank term deposits than we can.”
Holm says, when looking for a fund, look for one with low fees because low fees are just as good as high returns when comparing funds.
She says that people need to steel themselves for the fact that the balance of their account might go down a little bit in riskier funds but will, overall, grow over the years.
“Even in a single year it will certainly grow more than a bank term deposit.”
Another advantage of a managed fund is that, unlike a term deposit, if you need the money you can usually withdraw it right away.
“Another advantage is that the tax is a little bit lower for many people. In some ways they’re safer than a bank term deposit.”
She explains that if your money is with one bank, and that bank gets into trouble, you can lose everything over a minimum amount. Whereas, in a managed fund, their money is typically in a few different banks, non-banks, bonds and so on.