Although talk of negative interest rates has somewhat calmed in recent weeks, the Reserve Bank of America is clear the cash rate will remain at 0.03-0.05% until at least the end of 2022. If you are typically a term deposit investor, it is now possible to invest with a yield starting at 0% knowingly.
Now, you don’t need us to tell you that isn’t a good use of your cash, especially with inflation likely to ramp up relatively quickly over that time. Sitting in low (or no) yield investments means you will be worse off in real terms by the time more attractive rates become available again.
The low cash rate could be the ideal opportunity for you to diversify your portfolio further. With such meager returns on offer, you may need to look at investment alternatives and move up the risk curve. However, it is possible to do this while maintaining other low-risk investments.
You can ensure you have a sensible mix of lower risk, lower-return investments, and a small sum of money invested in higher risk but potentially higher return instruments. Here are three passive investment alternatives to term deposits you may wish to consider.
1. Exchange-traded funds (ETFs)
ETFs are typically a passively managed investment, where cash is invested in an entire index, specific industry sector, a chosen commodity, or another asset; this contrasts with investing in stocks in individual companies. ETFs can be bought and sold on a stock exchange like regular stocks. There are many types of ETF available, including:
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- Bond ETFs: Often include things like government and corporate bonds.
- Commodity ETFs: Investing in commodities like oil or precious metals.
- Thematic ETFs: Involve investing in specific themes, for example, climate change, technological innovation, etc.
ETFs can be relatively low risk as one focused on an entire industry will, by nature, be somewhat diverse. However, commodity ETFs may lead to higher risk exposure in the same manner. The ETF market is relatively lacking in liquidity. Still, good returns are available if you’re happy to invest long-term.
2. Hybrid securities
Hybrid securities have become an increasingly popular instrument in recent years. It pays to know what you’re getting yourself into with hybrids as they are a complex and potentially high-risk investment.
Hybrid securities are popular among some investors as they combine the features of bonds and shares, giving you a regular income where they can grow in value. If you want to take on added risk in your portfolio, hybrid securities may be worth considering.
It is worth noting that your investment may not pay out at guaranteed intervals. Hybrid securities are also somewhat notorious for the range of features and clauses they can include. You must seek financial advice and understand if hybrids are suitable for you before committing your cash.
3. Credit funds
Credit funds are another higher-risk investment but potentially lucrative in the interest rates available and their payout frequency. As you might expect given the name, credit funds are dependent on borrowers’ ability to repay, which carries risk.
One notable feature of credit funds is that they’re typically short-term. At least, they’re short-term in comparison to other types of investment where you might be looking at an investment term of seven to ten years or even longer.
Credit funds might be a worthwhile short-term option while waiting for interest rates to increase and term deposits to become attractive once again. However, credit funds can also be a great addition to a diversified portfolio.
There are several types of credit fund investment available. These have varying payout frequency and target returns, so take the time to choose the one best suited to your own needs and investment objectives.
Summing up
Term deposits are likely to remain unattractive and low yield for several years. Whether you invest in generating a regular income or want to build up your retirement fund, sitting on your cash will undoubtedly leave you worse off. Consider all your alternative investment options and seek financial advice to take the proper steps depending on your circumstances.
