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C & D

Term Deposits – Low Risk?

We were astounded yesterday when a spokesman for one of the country’s largest investment managers, made the comment on breakfast TV that KiwiSaver was really no riskier than a bank term deposit. Yes, there are risks associated with investing in term deposits. However there is minimal risk in losing investment capital, something that can readily occur when investing in KiwiSaver schemes.

We all know that interest rates in New Zealand are low, and this is reflected in the term deposit rates that the various trading banks are currently offering. For deposits of less than $10,000 the rates are unlikely to be much more than 3%, and for amounts greater than $10,000 they may approach 4%, however that it likely to be for a term of greater than three years. Realistically, after tax and inflation returns are negligible. They are almost a disincentive to saving.

With term deposit rates being so low, there is little opportunity cost to investing in a diversified way. Some people may consider investing additional funds into a KiwiSaver scheme. This can have some drawbacks. Most notably, is that the funds would be essentially locked in until the investor turns sixty five.

Many KiwiSaver investors are in conservative risk profile funds, and with their asset allocations the returns over the next ten years could be in the range of 3.5 - 4%, which is only slightly higher than current term deposit rates. This is not surprising as the conservative risk profile KiwiSaver schemes are predominantly invested in fixed interest.

If investor’s want investment returns greater than bank term deposit rates, they have to increase their investment risk. Conservative risk profile investors most likely will receive some benefit from a diversified investment portfolio over term deposits, provided the fees are low, and the underlying investments are well managed. There is also the quantum of the investments to consider.

If you transition from bank term deposits to a diversified investment portfolio that comprises share investments, your investment risk will increase. The key is to make sure that the investment portfolio is structured in such a manner that is appropriate for your investment risk profile.

In other words, you need to be able to cope both emotionally and financially with the potential loss of value on investments in the portfolio which does occur from time to time. This is something that you do not have to do with bank deposits, although there are plenty of people overseas who have lost massive amounts due to bank collapses over the past ten years.

It is very easy to stay invested in bank deposits. They are emotionally comfortable with minimal investment risk. The real risk, is that you may not be able to meet your financial goals by being invested in them if the interest rates become very low. The current low interest rates are likely to fall even further. It could be several years before they rise significantly.


Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Whakatane based Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.