Q. I have Self Managed Super Fund and in the past 3 years the majority of the funds have been in a high interest Savings Account and Term Deposits. Some of my Term Deposits are coming up to maturity. The available rates on reinvestment are about two thirds of what I was previously able to lock in at. I cant afford to reinvest at these current rates and meet my income needs. How do I get more income without taking on risk?
A. Over the past 3 years, Australian Cash rates have been cut from 5% to 3%. That represents a cut of 40% in the return on cash investments. As a consequences the rates offered for Term Deposits have fallen dramatically compared to 3 years ago. Your experience is a common dilemma faced by many who moved to cash following the fall in equity markets. With cash rates fallen and unlikely to rise substantially in the foreseeable future, the realities are that you need to look at other assets classes such as shares and property to provide for your income needs.
When managing risk, you need to identify what type of risk you are trying to reduce or remove. For example you moved to cash presumably out of equities to manage capital risk. Now you are looking to manage income risk. To improve returns you will need to take on some amount capital risk.
In your situation, your focus is on income, so invest into shares that have a history of consistent income earnings and distribution. Ensure you are well diversified and not reliant on a small range of stocks. There are a number of managed funds that specialise in shares with regular yield that diversify the portfolio with a focus on income. As an alternative or to further diversify your portfolio, a managed fund with a diversified portfolio of property, direct, Australian and overseas will also provide regular income whilst mitigating risk.
In all cases, an appropriate portfolio of investments will take into consideration your investment time frame, your appetite for risk, both income and capital. Managing risk is trade off between income risk and capital risk. As your circumstances dictate, you will be prepared to accept more of one type to protect against the other. The key is positioning your portfolio to be able to weather income or capital losses into the future.
The above article was originally published in The Australian.