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Term deposit vs managed fund
Choosing between a term deposit and a managed fund to invest your money will likely be influenced by your personal investment strategies and goals. Consider the advantages and risks of each to decide what’s right for you.
Term deposits and managed funds are both popular options for Australians when it comes to investing money. While both have the potential to earn you a return on your investment, they vary in risk and structure.
What is a term deposit?
A term deposit is a financial product that allows you to put a lump sum of money into a bank account to earn interest over a fixed term. The length of the fixed term will typically range from one month to five years, and you won’t have access to the funds for the duration of the chosen term.
The length of the fixed term will also influence the amount of interest you will earn on your investment – with longer term deposits typically offering higher interest rates. Term deposits have fixed interest rates, meaning they are locked in for the full period.
Once you reach the end of your fixed term, you’ll have the option to either withdraw your money or roll it over for another term.
Licensed term deposit providers are approved by the Australian Prudential Regulation Authority (APRA) as Authorised Deposit-Taking Institutions (ADI). What this means is that deposits up to $250,000 will be protected under the Australian Government’s Financial Claims Scheme in the worst-case scenario the provider was to go under. Because of this, term deposits tend to be considered a safer way to invest your money.
When weighing up whether a term deposit might be the right choice for you, consider both the benefits and risks:
Benefits
- You’ll know exactly what return you should see on your investment as both the interest rate and term are fixed.
- You can set and forget your term deposit investment as it doesn’t require any effort to maintain, making it a relatively easy way to make money.
- Relatively low risk compared to other investment options as there is little risk of losing your deposit.
Drawbacks
- You can’t easily access your money during the fixed term period. The only way you can is if you provide sufficient notice and pay a penalty fee.
- Because your interest rate is fixed, you won’t benefit from any rate rises that may come about during your fixed term.
- You can’t add extra savings to your investment after your initial lump sum deposit.
What is a managed fund?
A managed fund is an investment option that allows you to contribute money into a pool with other investors. The manager of the fund will then use the pool of money to buy assets such as bonds, shares, property trusts or cash. When you invest in a managed fund, you own units in the fund, not the underlying investments.
The value of the units you own will fluctuate in accordance with the value of the assets held by the fund. Most managed funds will pay investors an income, or ‘distributions’, based on the success of the fund’s investments. You may have the option to reinvest this income into the fund, increasing your overall investment.
Because the return on your investment is not fixed, it will fluctuate over time, meaning you won’t know how much it may be worth at any point in time. For this reason, many investors consider managed funds a longer-term investment. It’s important to consider the objectives of different managed funds to find one that aligns with your own. Consider using Moneysmart’s managed funds fee calculator for help with determining how fees may affect your investment.
Here are some of the potential advantages and disadvantages of managed funds for you to consider:
Benefits
- You’ll have the potential to earn a higher rate of return over the long term than fixed term investments may offer.
- You’ll have easier access to your funds if you need them, as they aren’t locked in for a specific amount of time. Likewise, you will generally have the option to invest additional funds after your initial investment.
- Because managed funds typically diversify by spreading their investments across multiple asset classes, it can minimise the risk of individual assets performing poorly.
Drawbacks
- Having your investment managed by a fund manager takes the burden off you, but it does come at a cost. Managed funds tend to charge a range of fees that can chip away at any earnings you may make.
- Your investment isn’t government guaranteed, so it poses a higher risk than some other investment options.
- You could lose some – or all – of your money if the fund’s investments don’t perform as well as projected.
How to choose between a term deposit and a managed fund
Gaining an understanding of how term deposits and managed funds work, and weighing up the pros and cons of each, can help you determine which option could work best for you.
You might also like to consider comparing individual term deposit products by using RateCity’s term deposit comparison tables, and see what kind of managed funds may be available by visiting our managed funds hub.
It’s important to read the product disclosure statement (PDS) of any product you’re considering, for information on risk level and other specifics.
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Product database updated 28 Apr, 2024
