INVESTOR HUB

Funds vs Bank Deposits

2017

There are advantages and disadvantages of every investment whether it be cash in the bank, in shares or bonds.  The question should not be "which one should I put my money into"  but rather – "how much of my money should I allocate to each?".  The latter requires some careful consideration of three key factors.

  1. Your life stage - If you are young you have a longer timeframe to take some knocks and subsequent rebounds. This allows you the freedom to entertain a higher growth investment portfolio (with more shares).  If you are retiring, you won’t necessarily have the ability to re-coup any capital lost, and therefore your choice of fund or investment will potentially be more conservative.
  2. Your appetite for risk – If you are risk averse, putting your money into higher growth investments (investments that carry greater risk) – then watching your investment value drop might not sit so well with you.  You have to be prepared for the downs, as well as the ups.
  3. Your investment objectives – Without having a view of what you want your investment to deliver, you are unlikely to see a result.  There are generally two camps for investors:
    • Growing your total investment capital (money) to a certain amount; or
    • Using your savings (your capital) to pay you a regular income for a set number of years.

It is important to invest with a clear objective otherwise you, and your investment, will flounder.

Bank vs Funds?

Term deposits have a place, when matched with the right investment objective.  For example, you may be seeking a secure place to retain money with a low risk of default  and the intention of drawing down on this investment in the short term.  Any prudent investor will have a percentage of their investment portfolio in cash. 

However, if you are using your bank savings as your key investment – then you need to be aware of the risks.

  • Interest Rate Risk – Deposit rates will rise if interest rates rise, but will fall if interest rates fall. For example, if interest rates fall from 6% to 3%, the income the investor in cash will receive will halve.
  • Inflation – Erosion of the real value of cash holdings by inflation is a significant risk. If the inflation rate is higher than the nominal interest rate (or term deposit rate) received, then the real value of your savings is reducing.
  • Break Fee  – Many term deposits will incur a break fee should you wish to take your money out early, which may substantially erode any of the interest you earned on that investment. 

Funds

A fund is where many investors can collectively invest in a portfolio, which is managed by a fund manager. It is unitised, so you become a unitholder. It is important to note that the funds are held on behalf of unit holders in a trust. A third party supervisor is responsible for supervising the performance of the fund manager’s functions, acting on behalf of investors, and ensuring the fund’s assets are appropriately held.

  • Expertise - The benefit of investing in a fund is that you have an expert (fund manager) making the investment decisions for you. They have parameters for the fund in which they are required to adhere to. For example, a parameter might be that that the fund can’t invest in more than 30% shares which limits its risk to ensure a more conservative investment approach is followed.
  • Choice – There may be many funds to choose from, to match your risk profile.
  • Savings – Some funds allow you to drip feed money on a regular basis, much like a savings account at the bank.
  • Access – You may be able to gain access to specific investments, that you would not otherwise afford if you were trying to invest in them directly yourself.
  • Growth opportunities – Unlike a term deposit, funds that invest in shares and bonds, provide the opportunity for capital growth, and thus a degree of inflation protection.

If investing directly in the share market is a little daunting, or you are simply seeking exposure to a particular market segment as part of a larger portfolio, then investing in a fund has merits. QuayStreet has a range of diversified funds for different risk profiles (conservative, balanced and growth) as well as sector funds and a socially responsible fund.

Contact our QuayStreet team - 0800 782 900

[1] http://www.rbnz.govt.nz/monetary-policy/official-cash-rate-decisions

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