By Greg McAweeney
While households might be rejoicing the fact that interest rates are likely to remain on hold for the next few months, investors relying on interest-linked returns may be less than thrilled. However, it’s a good idea to remember the many benefits offered by term deposits and high interest savings accounts before investing elsewhere.
Many economists expect interest rates will remain steady for the first half of 2011 following four separate rate rises last year and the economic impact of the Queensland floods.
While this may have resulted in slight reductions in rates for term deposits and some high interest savings accounts in recent weeks, both options still offer investors opportunities for strong, guaranteed returns and ready cash flow. And, for investors considering making a move away from cash or term deposits who are concerned that their money will lie idle, then it might be time to think again.
This is especially the case when you look at the lacklustre performance of other asset classes. In 2010 for example, the ASX 300 returned only 1.9%, compared to well over 6% from certain high interest savings accounts and term deposits.
These strong returns, coupled with continued relatively low inflation and the ongoing certainty offered by the Federal Government’s Deposit Guarantee*, mean that both high interest savings accounts and term deposits continue to deliver the goods.
And for investors who want regular access to cash and to capture steady returns, there’s no reason why, with the right planning, you can’t have both.
Firstly, to ensure a regular income, you can choose a term deposit that offers interest payment options that suit your needs, whether it’s monthly, quarterly, six-monthly, annually or when the term deposit falls due.
Another term deposit option is ‘laddering’. This involves investing in a range of term deposits that mature at different intervals. This way you receive not only a continual source of funds but also the opportunity to reinvest at different times. This smooths out rate rises and falls and - in the ideal scenario - captures the best rates on offer.
Or, you could try a ‘bullet’ strategy, in which you invest in different term deposits at various intervals - all of which have a common maturity date. This lets you take advantage of higher rates as and when they are on offer and is a great way to save for a particular purpose.
If, on the other hand, you’d prefer guaranteed returns with around-the-clock access to your cash, then despite the recent slight easing of rates, a high interest savings account continues to deliver both, giving you a secure and growing ‘cushion’ that, so long as you choose the right account, is not being eaten away by inflation or fees.
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*The Federal Government guarantee applies to deposits in Authorised Deposit Taking Institutions for under $1 million and remains in effect until October 2011.
