A beginner's guide to term deposits and managed funds

It’s one of the questions many investors face when considering their investment options: “Should I invest in a managed fund or a term deposit?” Like most other investment questions, the answer depends on a number of factors – and it will be different for different people. 

• What is a term deposit?
• What is a managed fund?
• Five things to consider
  • Potential investment returns
  • Remember to factor in inflation
  • Investment volatility
  • Investment flexibility
  • Your investment horizon
• Using a mix of investment types
• How to select a financial adviser

What is a term deposit?

Term deposits are usually offered by banks and are similar to savings accounts except you lock away your money for a set period of time, or term. Term deposits usually offer a guaranteed return an interest rate over the term, which is usually higher than what is offered by a savings account. The term can generally vary between 30 days to 5 years, and the interest rates offered vary between providers as does the length of the term. Interest rates change all the time depending on the economic conditions.

A term deposit offers the advantage of a set return and the repayment of the initial sum you invested, as long as you don’t break the term. The disadvantage is that you usually can’t access your money until the term has ended. Term deposits are sometimes viewed as the safest investment because your return is certain, and you have a very low risk of your investment going down. 

What is a managed fund?

A managed fund is quite a different kind of investment. There’s no set limit on the returns you can make from a managed fund, so they offer the potential for higher returns. However, it does mean that they’re also subject to volatility, so their value can rise and fall over time and you may not receive all of the initial investment back when you wish to withdraw.

There are many different types of managed funds. Most are a collection of different types of investments that are managed by specialist investment fund managers. The money received into the managed fund is pooled together, and a fund manager buys different assets such as shares and bonds on behalf of many investors. The investment allocation inside a managed fund means each one performs differently. Some managed funds contain a high percentage of assets that have a greater potential to grow over the long term, such as shares. For example, in the MAS Investment Funds the ‘Growth Fund’, ‘Aggressive Fund’ and the 'Global Equities Fund’ are invested in a higher percentage of shares than the MAS ‘Conservative Fund’. The downside of this kind of fund is the risk of increased volatility (or rises and falls in value) so suits a long term investment approach – for example for retirement savings. 

Other managed funds contain less volatile assets, which means they are less likely to experience rapid swings in value (both up and down) in the short or medium term. The tradeoff for this lower volatility is generally a lower potential for long term growth in your investment. Funds in the MAS Investment Funds with lower risk indicators are the ‘Cash Fund’ and the ‘Conservative Fund’.

5 things to consider when choosing between managed funds and term deposits

Here’s a few points to consider as you think about investing in a term deposit or a managed fund:

Potential investment return

One of the most important things to think about is how much you want your investment to grow. The growth of your investment is known as the ‘investment return’.   

With a term deposit, you know what your investment return is going to be, but with a managed fund there’s no guarantee. This means there is no cap on the potential gains you could make, but that potential for growth comes with the risk of volatility – the value of your investment rising and falling over time. The rule of thumb with managed funds is that you should only consider riskier funds with a higher potential for growth if you want to invest for the long term, say 8 to 10 years or longer. That way you have a lower chance of your investment going down in value as the markets fluctuate.

Remember to factor in inflation

When you’re considering your investment returns, you should remember to factor in inflation. While it might seem like a safe option to invest $1,000 in a term deposit for 12 months at 5% return, if the annual inflation rate is 8% over those 12 months, then the spending power of your money is going to be 3% lower at the end of the investment period. At the end of 12 months your initial investment will have grown to $1,050, but you’ll need $1,080 to buy the same things as a year ago.

Your attitude to risk

In most investments, the potential for higher returns comes with a higher risk that your investment might lose value. Generally speaking, the longer you invest for, the lower the chance your investment will lose value, even if it does go down temporarily along the way. Some people are OK with this, but some people aren’t. Before you make any investment choices, you should think about your personal attitude to risk and factor that into your decision.

Investment flexibility

Think about whether you’ll need to access your money at short notice or not. With a term deposit, you are locking away your money for a predetermined length of time (with some exceptions), but with a managed fund you can usually access it at short notice.

Your investment horizon

Investment horizon means the length of time you are investing for. You can understand this by working out your investment goals. You may want to ask yourself:

• Are you investing for your retirement, and how far away is that?
• Are you investing for a first home deposit? And if so, when do you anticipate buying that home?

If your investment horizon is long term (over 10 years away) you might consider a riskier managed fund like the Aggressive or Growth Funds in the MAS Investment Funds. Or maybe you have a medium-term investment goal, such as taking your family on a world trip in 5 years’ time. In that case, you might want to avoid the higher risk managed funds and go for a medium risk fund like the Balanced Fund in the MAS Investment Funds. If your horizon is shorter term you might want to consider a less volatile investment such as the Conservative Fund or the Cash Fund in the MAS Investment Funds. For example, if you are planning to use your money for a deposit on your first home sometime soon, such as within the next 3 years.

Choosing the best managed fund for you

If you’ve considered all these factors and decided that you want to invest in a managed fund, the next step is to decide which one. The MAS Investment Funds has 7 funds to match your risk appetite and investment timeframe. To make your choice, you could use our online Fund Finder tool. It will ask you a series of questions about the things we’ve discussed in this article and recommend a MAS Investment Fund that might be right for you.

Using a mix of investment types

One of the most important things to remember is that you don’t have to put all your money into the same investment. Many of us have many different investment goals, some are short term and some are long term. Many experienced investors split their money across different managed funds and term deposits, to match their different investment goals.

Working this out can sometimes be complicated, and it’s often a good idea to get investment advice from a qualified financial adviser.

How to choose a financial adviser

Getting investment advice from a professional adviser is a great idea. A professional financial adviser will ask you questions about your life goals, and help you make an investment plan to achieve them. Finding the right adviser is important. Not all advisers are the same. Some are qualified to offer more comprehensive advice than others, some charge for the service, some take commission from any investment you make on their recommendations.

It’s important you understand these things before you begin taking financial advice from someone. You should be confident they are qualified to give you advice, trust that they have your best interests at heart, and you feel comfortable working with them on a personal level. So, before you decide to take financial advice, you should have a preliminary conversation on the phone and ask the adviser some questions, such as:

• What will the process be when we meet?
• Will it cost me anything?
• What kinds of investments are you allowed to provide advice on?
• Will you receive commission on any investments I make with you? If so, how much?

After you've had the initial chat, you should know if you think the adviser is right for you. If they are, then make an appointment to meet them or get advice over the phone.

MAS Advisers

At MAS we have a team of Advisers who are available to meet in person and offer financial advice at no additional cost. MAS Advisers can advise you on MAS investments and insurance products, so they can guide you through selecting one or more of the MAS Investment Funds. MAS Advisers don’t receive commission on the products they sell. Many people say this gives them confidence that the MAS Adviser has their best interests at heart when they make their recommendations.