Term deposits or investment funds?

Having your money in term deposits is a convenient way to save. They’ll deliver you with fixed returns, but the level of interest you’ll get from them today, at least compared to say 10 years ago, is not as attractive. There are however other types of investments, such as ANZ’s investment funds, which over the long term could deliver you with more competitive returns and greater flexibility.

Here we take a look at the features of term deposits and investment funds, as both are great options depending upon your circumstances.

What’s your investment timeframe?
Term deposits are an excellent option for short to medium term goals, especially when you’re looking for lower risk and a fixed rate of return. With a fixed rate of return, term deposits have more certainty and offer more stable returns than an investment fund.

Investment funds, on the other hand, are suited to investors with a medium to long investment timeframe, or for those saving towards a specific goal. You should plan to hold your investment for longer so that you’re able to weather any dips in financial markets.

Over the longer-term, we expect all of the ANZ multi-asset class investment funds to have higher returns than what’s on offer from a rolling 6 month term deposit. However, it’s likely you’ll experience ups and downs in the value of your investments along the way and, for a short period of time, your return could be negative – you won’t get this with a term deposit.

Will you need access to your investment? 
Even the best made plans change sometimes. So it’s important to remember that term deposits are locked in until their maturity date. You can normally break the term early, but you’ll need to provide 31-days’ notice, and you’ll receive an interest rate reduction.

All ANZ investment funds (multi- and single-asset-class) have withdrawal flexibility, allowing you to request a withdrawal of all or part of your funds on any business day. You won’t be charged a fee on withdrawal. Of course, if you need access to your money at a time when financial markets are down, you may need to accept a lower level of return from your investment than what you were expecting.

Diversification is an important factor in investing
Diversification is a word you hear a lot of as an investor, and though it sounds fancy it’s actually pretty straightforward. Here’s a simple analogy to help explain the concept.

We know that eating an assortment of food groups is the best way to make sure your body gets all the nutrients it needs to stay healthy. If you only eat one type of food, you’ll probably suffer from a lack of vitamins, which could inhibit your growth. The same can be said for diversification in investing – a lack of ‘variety’ in your investment portfolio may mean your investment portfolio does not grow enough to meet your goals.

ANZ’s multi-asset-class investment funds invest in a variety of asset classes, including income assets such as cash and fixed interest (bonds), and growth assets such as equities (shares) and listed property, both local and international. This variety offers greater potential for growth, and investment risk is spread across different asset classes meaning that any weaker performing investments can be offset by better performing ones elsewhere in your portfolio.

With a term deposit, although it doesn’t have the diversification of multi-asset-class investment funds, the benefits of being a stable investment with a known return means it can be a good option to form part of your overall investment portfolio.

Single-asset-class investment funds are a bit different. As the name suggests, they invest in just one asset class which means they are not diversified across many different types of investments. However, you can create more diversity by building your investment portfolio up with a number of different single-asset-class funds.

Are you protected against inflation? 
New Zealand’s inflation rate is low at the moment, but has been over 5% as recently as 2011. When inflation rises, if your investment does not grow or it grows more slowly than inflation, your money buys you less. For example, if a bag of apples costs you $3 today, and inflation is 2%, that same bag might cost you $3.06 next year.

With any investment you need to consider the impact of inflation. If the inflation rate is higher than your return on investment, then the spending power of your money will decrease – that is, the increase in price of the bag of apples is greater than the return you receive from your investment.

Over the long term, an investment with exposure to growth assets (like the ANZ multi-asset class investment funds), is expected to increase in value above the rate of inflation, thereby providing protection against the decreased value of your money. While the bag of apples keeps going up in price, so does the value of your investment meaning you have more money to pay for them.

So, term deposits or investment funds? 
Both investment funds and term deposits are good investment options. It really depends on your personal circumstances; your financial goals, the time you have to achieve them and your appetite for risk.

If you have a short to medium term investment timeframe, want low risk and to know exactly what you will get back, a term deposit might well be appropriate. But if you’re saving for the longer term and want the prospect of a higher long term return which protects your savings from inflation, and you can handle some ups and downs in value along the way, then an investment fund might be more appropriate.

Additional information 
You can find more information about ANZ’s Term Deposits and investment funds online. As always, we recommend you talk to an expert about your personal situation before making any investment decisions. Contact your financial adviser, or contact us and we can put you in touch with an adviser.

Published November 2017

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