Term deposits are traditionally one of the investments of choice for those looking to turn their wealth into a steady stream of income. By agreeing to lock away your savings for a predetermined length of time, it’s possible to enjoy an all but guaranteed return on your investment in the form of interest earned on your savings. And with term deposits guaranteed by the government (up to $250,000), there’s almost no risk of losing your money.
However, in recent months, banks have been slashing term deposit interest rates dramatically. While term deposits have never been “get rich quick” investments, it’s now much harder to earn a steady income from term deposit interest, which many Australians (such as retirees) have relied upon in the past.
This has left some investors seeking term deposit alternatives, offering similarly low levels of risk, but with higher rates of return. While every investment is a risk, there are a few options that could fit the bill, though it’s important to seek financial advice before making any commitments.
No investments carry the same government guarantees as a term deposit. The Australian Securities and Investments Commission (ASIC) recently warned against investment products advertised as “term deposit alternatives”. Be realistic about the degree of financial risk you’re prepared to accept if you want those higher returns, and consider contacting a financial adviser before making a new investment.
If your goal for a term deposit is to grow your wealth for the future, an alternative option could be to deposit some of your savings into your superannuation fund. Most super funds are designed to grow your wealth over time, so you can be sitting on a comfortable nest egg by the time you retire.
However, it’s important to remember that once money is in your super fund, it’s very hard to get back out; even harder than if you have a term deposit. Under normal circumstances, you should only be able to access your super after you’ve reached your preservation age and retired. There are options for accessing super early, such as in cases of genuine financial hardship, though this is the exception rather than the rule.
If your plan was to use a term deposit to help save a deposit for a house, your super fund may be able to serve as a substitute. The First Home Super Saver (FHSS) Scheme will allow you to make extra payments into your super fund (such as by organising a salary sacrifice with your employer), so you won’t be able to easily spend this money. You can then access these extra payments when the time comes to put a deposit on your first home.
Income funds, mortgage funds and ETFs
Investing in shares, property, or other assets is generally considered a much riskier investment than a term deposit, as asset prices can quickly rise and fall. Also, while you can make money by actively buying, selling and trading shares, for example, this requires a lot more work than investing your savings into a term deposit to earn a passive income.
Some investment funds aim to help reduce the risk and complexity of investing, while promising to offer more consistent returns. These ‘income funds’ often invest in multiple assets of different types, so you’re less likely to lose everything if one asset price dives off a cliff.
Mortgage funds operate similarly, using investor money to help provide everyday borrowers with home loans. Because the mortgage market is traditionally considered relatively stable, investors may be able to expect regular returns with less risk of loss. Though there are exceptions – just look at the subprime mortgages that contributed to the 2008 global financial crisis,
Exchange Traded Funds, also known as ETFs or index funds, are investment products that let you put your money into shares of multiple companies simultaneously, rather than investing in shares of individual businesses. With your money effectively spread across an entire market, there’s a much lower chance of losing money due to a sudden fall in one company’s stock price. Barring a market crash, you can often expect to maintain a modest return on your investment.
We’ve all heard the stories of people who invested in Bitcoin and other cryptocurrencies at the earliest stages, then made massive returns on these investments. Investors looking for an alternative to traditional currency trading may have their eye on both well established and up and coming cryptocurrencies, in the hopes of seeing a repeat performance.
Of course, there are also plenty of stories of investors pouring money into crypto and losing it all. If you plan to invest in any form of alternative currency, remember to do your research first, consider seeking financial advice, and make sure you’re well aware of the risks involved.