With Australians riding the share market rollercoaster in recent months, many investors have sought alternative investment options. This has seen a spike in cash investments such as term deposits, as people respond to the idea of spreading their investments into other asset classes during tough financial times.
Term deposits are offered by most financial institutions, and they work by locking your money away for a period of time. The length of the term can range from 30 days to five years, but regardless, the interest rate you lock in is guaranteed not to change. What's more, the banks compensate you for locking down your money by offering a higher rate of interest than standard bank accounts. However, it is important to remember that your money is not available to you during the term, although if an emergency does arise you can withdraw your money for a fee.
The reason many people are turning to term deposits is because they are commonly recognised as a stable and low-risk investment option, making them more attractive for investors. Indeed, the Australian Prudential and Regulation Authority (APRA) reports that as of August 2011, we have almost $507 billion invested in term deposits and savings accounts, a figure which has risen by $6 billion since July.
Furthermore, many online and smaller banks allow you to open term deposit accounts over the internet, while those who prefer to do their business in person can open a deposit through the local branch of their bank. ING DIRECT has even extended their customers the opportunity to open a term deposit through Australia Post outlets.
When choosing your term deposit, the rate you receive will generally depend on the term and the institution. For example, if you have $5000 to invest for a five month period, St George Bank is currently offering a rate of 5.80 percent. By comparison, if you invested this amount for five years, the rate rises to 6.05 percent. However, these sorts of comparisons can depend on the bank's long-term outlook on interest rates, and a longer term deposit carries the very real risk of interest rates changing during that period.
If you need help selecting a term deposit, financial comparison sites, such as RateCity, can introduce you to many different products, but whichever one you choose, remember that a term deposit is just one element of a healthy and diversified investment strategy.