A term deposit is like a locked bank account. You agree to a fixed interest rate in exchange for investing your money for a set amount of time. It offers certainty and security, and you know exactly how much you are getting and when you are getting it.
The global financial crisis has prompted many investors to look for more secure investments. In the two years to May 2011, term deposits grew by more than $50 billion, as Australians sought some form of protection from the doom and gloom in investment markets.
At the end of the term, you can automatically roll over your balance to a new term deposit, at a new interest rate. Or you can agree in advance to close the term deposit and transfer the balance to your bank account.
Mix and match
Term deposits are a great way to put away specific amounts of cash needed to achieve specific goals. If you’re planning to settle on a new house next year, you may want to take out a term deposit that matures in six months.
Also, with interest rates changing, you don’t want all your eggs in one basket. So, it may be a good idea to put your money into smaller term deposits maturing at different times.
The case for term deposits…
- Easy and quick – It’s easier to get a term deposit up and running than to buy a property or establish a share portfolio.
- Secure and certain – There are no surprises. Unlike high interest savings accounts, you will receive a certain fixed return, regardless of what happens with interest rates.
- Control – You’re the boss. You don’t have to accept the terms on offer, and it is possible to negotiate if you need to free up your cash on a specific date.
Note that you can invest in term deposits directly with a bank or another financial institution, and in some cases you can also invest in term deposits using super monies through your super fund. If you are considering this, check the investment strategies offered through your fund and your own investment profile.
…and the case against
- Lack of access and break fees – Your money is locked away for the duration of the term. If you need to get your money out early, you will either be charged a break fee or reduced interest rate.
- Dual pricing – Automatic rollover comes with hidden dangers. You may not be able to access the advertised rates, which are often for new investments only. And you may miss the best rate, because you roll over at the wrong time.
- Strings attached – You may need to open an associated savings account to access the best rates.
If you agree to lock your money away for longer, you will generally receive a better rate. But over the long term, there may be better ways to invest your money to generate higher returns.
Only part of the solution?
In a recent article, Dr Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital, talked about alternative investment strategies, which we discuss below.
- Government bonds and real estate – Traditional alternatives to term deposits. But Australian 10-year bond yields have fallen to record lows. And after the house price boom of the past 20 years, real estate is vulnerable to an extended period of poor capital growth.
- Corporate debt – Potentially higher yields than term deposits, but without the volatility of shares. For Australian corporates, investment grade yields are around 6%.
- Australian Real Estate Investment Trusts (A-REIT) – Popular before the Global Financial Crisis, but high debt meant the sector fell 78% during the crisis, compared with 54% for Australian shares. Now that A-REITs have refocused on their core business of managing buildings and collecting rents, and with lower debt, Australian returns have improved and are currently the second highest in the world among REITs.
- Unlisted commercial property – Compared with residential property, they are regularly valued, so you know what you’re getting.
- Infrastructure – Underpinned by investments such as toll roads and utilities where demand is relatively stable.
Please call us today on to find out more about whether term deposits are right for you.
What you need to know
Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. If you decide to purchase or vary a financial product, your financial planner, our practice, AMP Financial Planning Pty Ltd and other companies within the AMP group will receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.