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Shares v term deposits: who's the real winner?

Shares v term deposits who's the real winner?

April 14, 2011

Investors heralded the buoyancy of the stock market recently, forecasting further growth in dividends, which inched ahead of bank term deposit yield on average this month.

The average dividend yield across the Australian Securities Exchange (ASX) is 5.80 percent, according to a report from financial services firm Russell Investments, provider of the Russell Australia High Dividend Index.

Compared to the average rate for a $10,000 12-month term deposit, which is 5.79 percent on products monitored by RateCity.

So with bank term deposits and shares so closely pegged at the moment, which investment type is the best bet for your nest egg?

How they stack up
When it comes to share market trading, one of the biggest benefits is that you have a relatively liquid asset. This means that you can quickly convert the stocks into cash when you need to by selling them.

On the other hand, bank term deposits are “locked in” and you may incur fees for breaking the term before maturity to access the funds.

Another advantage of Australian equities, over term deposits, is that they can offer long-term growth in dividends and also your capital, Russell Investments says. So even if the rates aren’t significantly higher than the average term deposit now, there is a chance that they will be one day.

There’s also a greater risk that dividends may decrease in the case that the share market dips or your shares perform poorly. But term deposits placed in an authorised deposit-taking institution of up to $1 million are guaranteed by the government. So there’s virtually no risk of losing your money when it’s invested in a bank term deposit.

Best term deposits
Bank term deposit rates vary depending on the wholesale or “money market” rate movements, so it’s often a good idea to compare term deposits online to find the most competitive rate of the day. You’ll likely even find a term deposit with a rate higher than the market average for term deposits, which will save you even more over time.

For instance, by investing $10,000 in a 12-month term deposit close to the average market rate (5.8 percent), you’d earn about $580 interest. Or by investing the same lump sum in one of the top rates available through products listed on RateCity, such as RaboDirect‘s 12-month term deposit, with a rate of 6.6 percent, you’ll earn $660 interest, which is an extra $80 in your pocket at maturity, simply by shopping around.

So clearly it pays to do your homework when comparing term deposits and share market investment options, because it’s your bottom line that will ultimately reap the rewards.

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