Why so many are turning to term deposits

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March 3, 2011

Investors with money to spare are continuing to look to cash products in 2011 to provide maximum security with attractive returns. Last year more than one-third of Australian investors voted with their feet to increase their holdings in products such as term deposits and other savings products.

Datamonitor senior analyst Andrew Haslip said in the post-GFC climate, investors were looking for the best possible combination of security and high returns.

"For those able to lock away their savings for longer periods, fixed income products were the most popular assets in 2010," Haslip said.

Low maintenance and high returns

For the household with a lump sum to invest, a high-interest term deposit has a number of advantages. Firstly, for the time-poor investor it is a relatively maintenance-free investment with an attractive return.

Many banks are now offering rates high-interest term deposits of more than 6 percent as they increase their emphasis on stable funding sources such as cash deposits, and compete more aggressively to attract them.

For instance, ANZ and Westpac are currently offering 6 percent interest on an investment of $10,000 for 180 days. That translates to $296 in interest earnings over the term of the investment.

If you have a smaller lump sum to deposit, rates as high as 6.6 percent are still available if you are willing to shop around and lock your money in for 12 months, earning you $66 on a minimum $1000 investment.

Lock in a high rate then plan ahead

A second advantage is that with a term deposit, the interest rate is locked in and you can plan for a fixed return on maturity.

Of course, you may be disappointed if savings rates climb during the term of the deposit, and if you need emergency access to your funds, you will also pay a penalty for early withdrawal.

That said, the savings interest you receive will not fall if general interest rates drop. And for keen shoppers, a term deposit ties your money up, to a degree, making it harder to blow on compulsive purchases.

Most importantly, be sure you can afford to get by without the money that's tied up in a term deposit, and do your homework comparing the best rates available for the term that suits you.

Take control of your investment by being aware of when it is due to mature. Give instructions to your financial institution beforehand so you can access your funds on maturity or roll them over at the best possible rate. Then sit back and watch your savings grow.

 Related term deposit links

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