Term deposits remain popular despite the general consensus that low rates are likely to linger well into the New Year. For those seeking a low-maintenance, low-risk approach to saving, term deposits can be appealing. Funds are locked away and are generally inaccessible until maturity, without early withdrawal penalties. They also may benefit from a government guarantee, depending on the size of the deposit. This allows you to set and forget, reducing any temptation to dip into your savings.
For those wanting to generate income off their savings, or make their money work a little harder, term deposits may not currently be the most prosperous option. If you’re looking for a higher return on your investment here are three alternatives to consider:
High-Interest Savings Account
High-interest savings accounts can be a good option as they provide greater flexibility when accessing funds and have the potential to accrue more interest. This type of account typically offers a bonus interest rate on top of a standard variable rate, making it a more competitive option than many term deposits on the market.
When and how interest payments are made can have a significant effect on your overall return. Most high-interest savings accounts pay interest in monthly increments. If you’re able to let your money sit without touching it, this can greatly boost your savings potential. Many savings accounts offer features such as an ongoing bonus interest rate, which allows you to earn money on interest already accrued. Keep an eye out for accounts with these added benefits.
Most high-interest savings accounts need you to meet certain criteria each month as an incentive for receiving the bonus rate. You may be required to deposit a particular amount each month or refrain from making withdrawals. It’s essential to familiarise yourself with any account conditions to ensure you’re receiving the highest possible rate, since standard variable rates are generally quite low.
Pros
- Higher interest rate
- Compounded interest
- No minimum deposit or early exit fees
- Government guarantee, depending on the amount deposited
Cons
- Rate uncertainty
- Bonus interest may be subject to certain conditions
Corporate Bonds
Fixed income assets such as corporate bonds can provide a relatively stable and predictable income stream (subject to there being no default by the issuer). Much like a term deposit, interest is paid in regular instalments (coupons) until maturity, allowing you to predict what you’ll be paid and when. In risk vs return terms, corporate bonds are positioned slightly higher than term deposits, hence they generally offer a higher return than term deposits. Whilst they don’t have the benefit of a government guarantee, they carry considerably less risk than shares.
Australian investors tend to largely overlook corporate bonds in favour of property or equities, however their capital stability and reliable income make them a good alternative to a term deposit.
Many investors are beginning to recognise corporate bonds as being vital to a well-rounded, diversified portfolio. Historically, corporate bonds required a high minimum investment amount and were sometimes difficult for individual investors to access, but this is no longer the case, since the introduction of XTBs trading on ASX.
Pros
- Higher return than term deposits
- XTB unit sizes of $100 allow for diversification with only a few thousand dollars
- XTBs can be sold on ASX without incurring penalties
- Ability to select bonds issued by the company of your choice
- Choose between fixed-rate and floating-rate bonds.
Cons
- May get a lower re-sale price if you decide to sell your bond before the maturity date
- May lose capital or income if the company defaults
- Doesn’t have the government guarantee like a term deposit
- Incremental step-up in risk.
Shares
Investing in the share market is certainly one of the more popular investments for Australian investors, due to the prospect of higher gains. However, with it comes higher risks. Individual stocks can be daunting, as you don’t want all your eggs in one basket. With a little research however, you can find relatively stable stocks listed on the ASX that offer the prospect of capital growth and consistent dividend returns.
While share selection can mitigate risk up to a certain degree, share market returns are never predictable. For this reason, you need to view shares simply as one part of an overall diversified investment portfolio.
Pros
- The prospect of capital growth
- Dividend payments
- Relatively liquid investment.
Cons
- The prospect of capital losses
- Brokerage fees
- Capital gains taxes on profitable trades.
Determining where to invest your savings depends on your individual circumstances and how comfortable you are with risk. It’s important to ask yourself how much value you place on accessibility, security and earnings potential when it comes to your assets, as all three come with trade-offs.
Regardless of your choice, a good understanding of the product or its correlation to the alternatives is essential, if you want to maximise your return.
