‘Risk-free’ cash still king for many investors
Here’s a guide to finding a better rate
Cash-focussed investors are feeling the pinch with record low interest rates persisting this year.
The Reserve Bank is likely to keep rates subdued for the foreseeable future, noting an “uncertain” economic outlook as the nation struggles through lockdowns.
Yet however low term deposit rates may be, there will always hold a special place for investors because they are genuinely “risk-free” – that is, they are guaranteed to the tune of $250,000 per person, per bank.
Finding new ideas in cash is a difficult business. Most investors will try comparison websites such as Canstar and Rate City. The websites compare most banks and show the rates in return for a commission paid directly from the financial institution, if you click through their comparison website to the product and invest.
Another option – popular among financial advisers – is to set up an account with a firm such as Australian Money Market, which operates a direct investing marketplace. Once set up, people can access more than 20 financial institutions’ cash and term deposit investments.
You do not need to lodge forms each time you invest. As part of the set-up process, you grant Australian Money Market authority to debit your cash account so it can send funds to the provider with which you have selected to invest.
No custodian or trust account is used, and the investor always retains money in their name – whether it be in the base cash management account or when moved to a term deposit or other investment.
Stephen Jewell, managing director of Australian Money Market, says “Our typical investor is a self-managed super fund with $160,000 invested with an average term deposit or bond maturity of six months.”
“Banks go through periods where they do not need deposits so they will drop term deposit rates, while other banks may want liquidity and bump up term deposit rates, so the differential in rates between banks can be substantial. Our advantage is that we make the various rates visible for investors and make the process easy.”
Even in the low-rate world, there can be considerable differences. For example, looking at the Adelaide Bank website, its 12-month term deposit rate is 0.3 percent, whereas Judo Bank is offering 0.95 percent, meaning you can get triple the interest just by shopping around.
Australian Money Market acts as a brokerage service and receives what it notes as a “brokerage”, which on average is 0.1 percent of the amount invested from the financial institutions. The implications for the investor is that they do not have to pay a platform fee to access the Australian Money Market platform.
Of the $5.5Bn invested in cash and term deposits via Australian Money Market, Jewell has noticed a trend away from term deposits towards “at call” cash accounts.
Jewell says, “two years ago the ratio of term deposits to call accounts was 80-20, but today it sits at 45-55. Investors have preferred at-call deposit accounts paying better interest rates than term deposits, which have the benefit of retaining liquidity without compromising interest earned.”
Australian Money Market also has a relationship with Australian Bond Exchange, so bonds can be purchased. And more recently, 50 managed funds have been added to the platform with another 150 in the queue.
Jewell says, “investors are chasing high yield so we are trying to accommodate them by providing more investment options for them to pursue through our digital marketplace.”
If you have cash that you wish to invest into at-call accounts, term deposits or bonds, comparison websites help, as do direct investment marketplaces. They are unlikely to cover the whole market, so it is important to do your own research just in case you unearth a gem.
Keep in mind that the $250,000 government guarantee on deposits is an important feature for more cash investors, so do not be blinded by high rates of interest on offer from smaller firms. Check whether the investment will be covered by the guarantee before making a decision and seek professional advice to ensure you understand what level of risk is involved.
This article was first published in The Weekend Australian by James Gerrard of financial planning firm, FinancialAdvisor.com.au,.