Q: Available Term Deposit rates are shocking. What investment alternatives are available to invest in fixed interest? I see advertised rates in the market offering 7%, are these suitable alternatives?
A: If you are not prepared to take any greater level of risk, consider “high interest” savings accounts as an alternative to Term deposits, as the rates on offer may be higher provided you meet the ongoing deposit requirements.
In order to secure higher interest returns, investors have no choice but to accept more risk.
Bonds are issued by the Federal and State governments or large companies. You can purchase these either on issue or via a Fixed Interest broker. The yield is determined by the credit rating of the institution issuing the bond and the coupon (interest rate) at the time of issue. The price you pay for the bonds will reflect the attractiveness of the coupon paid and the remaining time to maturity. This price may be at a premium to the face value of the bond. Remember that if you pay $106 for a bond in the market, you will only receive the $100 face value on maturity. An alternative to buying individual bonds is to invest in a managed fund that invests in a diversified range of bonds or to invest in an ETF that replicates a Bond index.
Hybrid investments are securities that have debt and equity-like features. Generally, they offer a quarterly coupon (interest) payment, with a franking credit and potential for conversion to the underlying issuers shares at a predetermined time, at the discretion of the issuer. The attraction of hybrids is that they often will pay a higher coupon than conventional fixed interest investments such as Term deposits or bonds. The current coupon rate available on new issues is around 4 to 5% (including franking credits).
The big problem with hybrid securities is they are priced in the market based on the supply of notes for sale and the demand for said notes. The investor is taking on a variety of equity-like risks with Hybrids which they would not be taking on through investing in a Term Deposit, which are government guaranteed up to $250,000 per person per bank. Term Deposits can be cashed with the bank at full face value albeit, with a penalty on interest, hybrids need to be sold on the market and the price could vary dramatically from the face value.
Whilst Hybrids are often marketed as fixed interest investments, they are complex in nature and carry risks often not easily understood. So be careful and know what you are buying.
Credit funds provide access to credit for developers, lower grade corporate borrowers, secondary mortgage providers, lease financing and those seeking loans not offered by the conventional banking market. By investing in a Credit fund you are receiving a higher rate of interest as reward for taking additional risk by offering credit with security over higher risk or volatile assets.
Interest rates offered vary from around 4% through to 9% p.a . On the surface these rates look attractive but be very careful that you understand what you are investing in. Ensure the company has well diversified book of loans and a proven track record in managing credit. Make sure you understand what risks you face and how liquid your investment is. Credit funds should only be used as part of a diversified portfolio and do not replace the role of cash or term deposit investments.
Property and Infrastructure trusts offer exposure to both Australian and international property and infrastructure either listed or unlisted that typically deliver consistent income over the long term. These trusts offer a range of exposure from syndication of individual properties through to trusts offering exposure to a diversified range of properties by location or type. Some trusts offer exposure to specific sectors such as office, retail, or industrial. You can also gain exposure to niche sectors such as leisure, health or aged care. Check the level of borrowing within the funds and also the quality of tenants and the average time remaining on lease for tenants. Listed trusts are easily traded. Syndication often requires funds to be locked up for 7-10 years. If the assets are global, distribution returns can be affected by currency movements.
In all investments there are income risk and capital risks. Generally those prepared to accept higher risks are rewarded, but you need to understand what risks you face and ensure you are receiving sufficient return for accepting those risks. To reduce investment risk you should seek to diversify your portfolio and avoid having all your eggs in one basket.