When you open a superannuation account, your money is generally invested by professionals with a view to grow your balance and help you build a nest egg for retirement.
Superannuation funds often make fixed-interest investments, and there are many reasons for this. We’re going to look at the ins and outs of superannuation funds that undertake fixed-interest investments, and the situation where this might and might not be the best way for you to grow your nest egg.
How do superannuation funds invest my money?
Superannuation funds generally offer members a range of options when it comes to the way they invest members’ funds, and this can have a significant impact on your overall returns:
- Growth-driven investments – These investments aim for higher member returns over the long term, but could result in significant losses in years where the market is not performing well. These investments can increase your wealth significantly, but there is risk.
- Balanced investments – These investments try to offer the best of both worlds, giving their members the chance to unlock reasonable returns. You still have the potential to increase your wealth, but you’re better hedged if the market is performing badly.
- Conservative investments – These investments typically offer lower returns then their counterparts. The upside is there is a significantly reduced risk of loss, and the chances of having a ‘bad year’ that will reduce your balance are generally much lower.
How do superannuation fixed interest investments fit in?
Superannuation funds that offer a conservative approach will often make fixed interest investments on behalf of their members.
Fixed-interest investments generally occur when an investor lends money to governments, semi-government bodies and corporations, with an interest rate that is fixed and agreed upon for the term of the loan.
This offers a level of investment certainty which can be attractive to many superannuation members looking to minimise their risk.
What are the pros and cons of superannuation fixed interest investments?
- Lower risks over the short term – Superannuation funds with conservative approaches that offer fixed-interest investments can offer lower short-term risk, which many super account owners would find attractive, especially if the market is performing poorly.
- Can be good for diversification – Fixed-interest investments also play a part in diversified portfolios. As these investments can perform quite differently from growth-driven ones, they can be useful to have up your sleeve as part of a balanced investment strategy.
- Potential for a lower return over the long term – While there is less chance of copping a hit in your super balance as the result of a bad year in the short term, this other side of fixed-interest superannuation investments is that there will potentially be lower returns over the long term. Choosing a conservative investment strategy with fixed interest can be effective, but you could also miss the chance to significantly increase your superannuation balance.