What Pays Better than a Term Deposit?
Chasing the best term deposit rates is a common pastime for Australian investors with surplus cash. When shares are too volatile, property is too expensive and cash accounts are not paying much if anything, investors call us and ask us what to do. Below are our go-to investments when a term deposit just doesn’t pay enough.
Note: Term deposits are still government guaranteed, so as soon as we move outside of the term deposits issued by banks, we immediately increase the risk. This article is general advice only and you should read the PDS’s of the respective investments mentioned below, to see if the investment is right for you. Alternatively, book a phone call with one of our advisers here.
When looking at investments that pay better than term deposits, we look at the following criteria:
We want to know how easily we can access our money.
Most investors understand cash accounts, where we have instant access to our money; Shares where we can get our money in three business days if required and term deposits, that are locked up for the term of the investment, say three months or two years etc.
Investment products are just the same. Some give you access to your money within a few days or a week, others are just like selling shares and some can be locked up for months or years.
Generally, the longer you lock your money up for, the better the return.
Every decision has risk, from buying BHP shares to choosing the wrong food stall in a Thai street market. The severity of the risk is proportionate to the ‘underlying asset’, such as BHP shares or the ‘beef’ dish that somehow seems odd for a country with a limited number of cows, but an abundance of local dogs…
When looking at investment products, it’s important to know how they are generating their return. Typical underlying investments in this space are:
a) Retail mortgages - just like the one you many have on your house
b) Corporate debt - loans to companies like BHP, Westfield or JB Hi-fi etc.
c) Government debt - loans (or bonds) to state or federal government (NSW, VIC, Australia etc.)
d) Construction / Developer Loans - lending money to the company building the skyscrapers in Sydney CBD, or the five-story apartment block on top of the new supermarket being built down the road.
Each underlying asset has its own risks and idiosyncrasies. The general rule of thumb is that the higher the return being paid, the higher the risk on the underlying investments.
This is not always the case however and sometimes you can get very high returns from very obscure circumstances. Here is a video about some very low-risk investments we made which paid 24%pa.
Banks are complicated structures, but easy to understand. Investments are rather similar, although less well-known.
Types of investments
In general, we have:
1) Managed funds – where your investment is pooled with others’. The manager allocates the money according to the rule book (investment mandate described in the PDS)
2) Listed investment companies (LICs) – similar to a managed fund, but trades on the ASX. A bit like BHP shares, to enter you buy existing shares from an existing investor. And the same in reverse when selling, you sell to a new investor.
3) Select Managed Funds – just like a managed fund except you get to see exactly what project/s you’re investing in. You know the exact address and specifics of the company / people you’re lending money to.
Note that structures and PDSs can be rather complicated. If you’d like a professional adviser to assist you, you can schedule a call here.
Our go-to list of Investment Products
La Trobe Financial
The biggest mortgage fund in the country.
La Trobe pools our clients’ investments with others’, to total about $9bn. These funds are used in the same way as a bank - the money is lent out to home buyers etc. at a higher rate than what we’re paid as investors.
It’s important to note that La Trobe is not a bank, they just operative in a very similar way to a bank.
For a lower return (but generally better than all term deposit rates in the country) we can either get our money back within 2-3 three days
For a higher rate that pays more than most Australians’ mortgage costs, we lock up for a 12-month investment, just like a term deposit.
Smarter Money Active Cash
This is a managed fund that invests in term deposits.
Think of when you shop around for your term deposit, they do this professionally, all day long. Think of it like day-trading term deposits, and they have a very good track record.
We find the returns are generally better than all the term deposit rates in the country.
Metrics Fixed Income
There are ASX-listed managed funds that invest in either corporate bonds, such as BHP etc, or government bonds, like NSW government etc.
The returns are normally between term deposit rates and mortgage rates, or slightly better. Two that we consider are:
MCP INCOME OPPORTUNITIES TRUST [MOT] and MCP MASTER INCOME TRUST [MXT]
Ark Asset Management
When our clients want a higher return and more bespoke investment, we work with Ark.
The investments our clients utilise are hand-picked. We work through the valuation reports and the financials of the borrowers and guarantors behind the loans, to understand what the risk of the investment is.
Our clients feel more comfortable knowing the full details of where their money has been loaned and exactly what it’s being used for and importantly who is responsible for paying it back – with interest!
The investment returns we receive from Ark are normally higher than all the above-mentioned products described above.
If you’d like to explore getting higher returns than a term deposit and discuss these investments in more detail, book a phone call here.