Partnervest
The recent decision by the Reserve Bank of Australia (RBA) to raise the national cash rate by 25 basis points to 3.85% in May 2023 has sparked renewed interest in term deposits among Australian investors.
This increase has left Australians holding savings accounts with the prospect of earning more interest on their wealth.
But is it the best time to embrace term deposits, or should investors be looking elsewhere?
The Allure of Term Deposits Amidst Rising Rates
Term deposits have experienced a rapid increase in rates over the past year, breathing new life into the market. Previously characterised by low rates and minimal movement, term deposits now present more compelling options for savers seeking relatively low-risk investments.
The aggregated one-year deposit rates offered from Australia’s 5 largest banks have risen from 0.25% p.a. in April 2022 to almost 3.2% p.a. as of this writing. (1) While term deposits offer attractive yields, there are several factors that investors should consider before committing their funds.
Potential Drawbacks of Term Deposits in a Changing Landscape
In a fast-changing investment landscape, several factors need careful evaluation to make informed decisions. Understanding the potential drawbacks of term deposits and exploring alternative investment avenues becomes crucial for investors seeking wealth allocations with optimal mixes of risk and return.
Inflation Risk
While term deposits provide a fixed income stream, they may struggle to keep pace with inflation rates. The reason term deposits are offering higher rates today is, after all, because of the inflationary environment we find ourselves in.
The current annual inflation rate of 7.0% in Australia may pose a challenge for term deposit investors looking to maintain the real value or purchasing power of returns earned. (2) Investors must carefully consider the impact of inflation on their investment returns.
Liquidity Concerns
Term deposits also feature a lack of liquidity. Once funds are locked into a term deposit, early withdrawals can result in penalties or reduced interest rates. A liquid fixed income security by contrast can be sold and allow the investor to access any capital appreciation that has occurred from the lowering of market interest rates.
It is essential for investors to carefully assess their liquidity needs and ensure they have adequate emergency funds accessible in case of unforeseen circumstances.
Opportunity Cost and Missed Investment Opportunities
By committing funds to a term deposit with a fixed term, investors may miss out on potential investment opportunities that arise during that period. If other investment options offer higher returns or better prospects, investors may not be able to take advantage of them until the term deposit matures.
We believe diversification across different asset classes and investment instruments is crucial for mitigating risks and potentially enhancing overall returns. As the RBA implements interest rate hikes, the economic landscape may undergo significant changes. Higher interest rates could signal a potential economic downturn, which may make longer-maturity fixed income instruments more attractive for investors. It is vital for investors to consider their investment goals, risk tolerance, and time horizons.
Partnervest – Building Diversified Portfolios
At Partnervest, we offer portfolios designed to provide diversification based on a careful analysis of the underlying exposures within. These portfolios are then adjusted to consider the relative attractiveness of each asset class given the prevailing economic conditions, whilst maintaining targeted risk and return parameters.
Our online platform is designed to make it easy for you to allocate your cash to a portfolio of carefully selected investment products designed to harness the benefits of diversification, and specified to target risk and volatility levels. In a world of rising uncertainty and fast-moving markets, having a partner that can help you invest your wealth quickly, easily, and intelligently can make all the difference.
To learn more about how Partnervest can help you build your financial future, contact Serg Premier 1300 734 496 or email [email protected]. Serg Premier is the managing director of Partnervest responsible for managing institutional , charities and advisors for the Partnervest funds.
(1) Source: Franklin Templeton, RBA Statistics – https://www.rba.gov.au/statistics/tables/xls/f04hist.xls
(2) As of 26/04/2023, Source: Franklin Templeton, Australian Bureau of Statistics
IMPORTANT INFORMATION
* You also need to maintain a balance of at least $2500 in your Cash Hub at all times.
All investments carry risk. Before deciding to invest, you should consider the following key risks:
• The value of investments will vary. You can lose money as well as make money.
• The level of returns will vary, and future returns will differ from past returns
• Returns are not guaranteed and investors may lose some or all of their money, and
• Laws change.
Past performance is not an indicator of future returns. Issued by Partnervest, a division of Franklin Templeton Australia Limited (ABN 76 004 835 849, AFSL 240827).
Before making an investment decision you should read the relevant Product Disclosure Statement (PDS) carefully and you need to consider, with or without the assistance of a financial advisor, whether such an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. The PDS is available and can be obtained by contacting Partnervest on 1800 679 541 or at www.partnervest.com.au. In accordance with the Design and Distribution Obligations and Product Interventions Powers requirements, we maintain Target Market Determinations (TMD) for each of our Funds. All documents can be found via www.franklintempleton.com.au or by calling 1800 673 776.
The information in this presentation is of a general nature only and is not intended to be, and is not, a complete or definitive statement of the matters described in it. The information does not constitute specific investment advice and does not include recommendations on any particular securities. Franklin Templeton Australia Limited nor any of its related parties, guarantee the repayment of capital or performance of any of the Franklin Templeton trusts referred to in this document. Although statements of fact in this presentation have been obtained from and are based upon sources Franklin Templeton Australia Limited believe to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions and estimates included in this communication constitute our judgement as of the date of this communication and are subject to change without notice.
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Term Deposits in an Era of Rising Interest Rates: Is it the Optimal Investment Choice?