Like a term deposits, but better

Term deposits are strong, secure and down-right uninspiring. The returns are low, you’re locked in and left with the feeling that you probably could have done a fair bit better - chances are you could have.

Here we explore investments that our clients use instead of term deposits.

NOT term deposits

Let’s be clear. A term deposits is with a bank, and a deposit with a bank is very different from an investment into say, a managed fund.

If you’re not comfortable with the investment side, then exit here and stick with what’s best for you. This is general advice not personal advice.

Investment Products:

Most other investments are a form of pooled investments, where the most popular are Exchange Traded Funds (ETFs).

While there are many other structures beyond ETFs, that discussion is a whole other topic in itself, so let’s simplify them all as funds that you and I, as everyday investors, can invest in.

Product Types:

Australians are spoilt for choice with a vast array of funds to invest in, although that broad range comes with the possible downside of 'analysis paralysis'.

We’ll break the available funds down into:

ASX-listed funds
Mortgage funds
Deposit funds

ASX-listed funds:

BetaShares have the Australian High Interest Cash ETF fund that pays 2.03% pa.

As an ETF, it’s as easy as buying and selling BHP through your online trading account.

The catch we find is that we have to pay brokerage to buy and sell, and for the smaller amounts, the numbers just simply don’t work.

Even if you’re paying wholesale rates of 0.11% - the round trip brings that down to 1.81%.

Compared to a standard Macquarie 1 month term deposits at 2% pa, clients start to question whether they can wait a month for their smaller amounts of cash, and normally say that they can.

Most ETF providers offer a similar cash ETF product with similar rates.

Mortgage Funds:

These act link a bank, but are not a bank.

When we invest into a mortgage fund they pool our money and lend it out to borrowers for loans, such as to buy a house. Most clients understand this to be what a bank does.

While the legal structure is notably different from a bank, most investors are not too interested in the detail. Although, if World War III were to break out, then the legal structures do matter, and for some, in 2008-09, it mattered.

We use a range of mortgage funds, both short term and long term, the most popular are Australia’s largest and oldest being La Trobe. For 12 months we’re getting over 5% pa (compared to Macquarie’s 12 months TD at 2.2% or 5 year TD at 2.80%pa.

We use La Trobe because:

They are Australia’s largest and oldest mortgage fund
The transparency in this fund is far greater than any competitors – you can see where your money is being lent out
Greater transparency reduces the risk of being involved with undesirable investments
The fund increased in size and strength during and after the GFC, when a lot of their competitors folded.
Fixed term redemptions - this makes our money harder to get to, but no more difficult than a TD. The benefit of the fixed term is that the fund hasn’t ever had issues paying out redemptions. This is the most important aspect for all mortgage funds - that you get your money back on the date you signed up for.

There are other mortgage funds that may have slightly lower or higher returns, although none tick all the boxes listed above.

Examples are:

It’s worth noting that we use other funds as well, sometimes 1-2 years at 7-9%+, and some case-by-case investments up to 27%pa, although the funds listed above are most well-known funds and always open for investment.

Deposit Funds

Cash accounts provide negligible interest rate returns, however we’d still like the cash to be doing more for us than nothing.

Again, there are funds for us to invest in.

These funds aim to provide you with liquidity, or redemption access similar to the ASX; one to three days’ time.

Some funds effectively invest in TDs and consistently trade the TDs when better TDs become available. Other funds invest in a staggered stream of government or corporate bonds with known repayment and interest (coupon) dates.

To enable this fluid liquidity for investors to have constant access to their money, a portion of the fund’s investments needs to constantly be expiring and at the ready to return to investors – whether the investors redeem funds or not.

This constant liquidity compromises the investment team’s ability to pick the best possible investments for the fund, and in turn reflects in lower rates of return than the mortgage funds listed above.

Popular funds are: