High returns on cash – just as people were getting used to them, they disappeared.
It should have come as no surprise, especially considering the long term return of cash in Australia since 1900 is 4.8% per annum.
The ongoing fall in interest rates has sent many people relying on those cash and term deposit rates searching for something better.
Of course, if they’re staying in cash and want that safety, they don’t want to sacrifice the government guarantee.
So when people are hunting around for better deals on their money, they need to be sure they’re actually locking their money away in term deposits, or putting it in savings accounts.
Some investors on the hunt for higher interest rates on cash are inadvertently stumbling into mortgage or bond funds.
Visit the websites of various financial service companies and you’ll find the returns from these funds displayed in a table with savings accounts and term deposits.
One company has a fund which is a mixture of savings and mortgage/bond funds, yet it’s their only offering under the clearly labelled ‘savings’ section of their website.
The company also uses language that gives the impression that their funds are as safe as dropping your money in the bank.
Terms like ‘access to a government liquidity facility with the Reserve Bank of Australia’ give the impression of a government backing.
These funds offer a higher return because they have a higher risk than bank deposits.
The risks, while relatively small, are that mortgages begin to default and the fund is frozen – something that has happened in the past.
Another consideration is the return rate being quoted, it’s historical and no indicator of future returns.
Not that there’s anything wrong with choosing a mortgage or bond fund to invest in, especially at the moment as they’re offering a premium to cash.
However, it is important to understand the distinction because unless it says ‘term deposit’ or ‘savings account’ your money won’t be sitting in either of those options.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. Need help with your financial your financial future, we think we’re the best financial adviser in Australia.
