With the current wave of interest rate cuts and more predicted cuts to come, many investors would be forgiven for thinking that an allocation to any type of fixed-interest product would prove to be a bad decision.
However, the right decision will be different for everyone, but it’s definitely worthwhile looking into and dispelling some of the myths people have about fixed interest investments.
Myth #1 – Fixed interest means your money is locked away
In many cases, fixed interest may mean that your money is locked away for a period of time (although it’s not always the case – see Myth #2 below), but you can still take control in this space. Rather than investing all of your allocation to fixed interest into a single-term deposit you could consider splitting it over a range of term deposits of different lengths. For example, you could put some into a three-month term, and some into a six-month term.
When looking at term deposits, a longer term will generally pay a higher interest rate, but that rate has been determined based on the bank’s view of where interest rates will move. If you have a view that interest rates will move up in three months, then a three-month term may give you the flexibility to take advantage of that rise in the future, rather than having it all locked away for six months at a lower rate. Of course, if rates fell further, then you still have the advantage of some of your money locked away in a six-month term deposit at a higher rate.
Myth #2 – Fixed interest means investing in a term deposit
As Myth #1 tells us, not all fixed interest products equals term deposits. There is a range of managed funds available that have some characteristics of term deposits but provide more flexibility and without being locked away for a set period. Many of these investments are listed on the stock exchange.
Being listed investments, it’s likely you won’t need as much to invest in these products, compared to the minimum investment amounts many term deposits require. And while the return you achieve on these investments is akin to a fixed-interest payment, the fund managers will have a range of underlying investments, including government debt. This might give you a greater sense of security about the income received and about getting your investment back compared with investments in shares.
Myth #3 – Fixed-interest investments don’t provide any form of capital growth
With term deposits, this is certainly true. But if you focus back on why you’re investing in this type of product, there may be an alternative option. Annuity investments have gained popularity in recent years, and could provide an alternative. Annuities generally provide a guaranteed payment over a set period (with the payment determined upfront), and the providers then invest the money they receive in a way that ensures they can meet future payment requirements.
You can invest your money knowing it will come back over a period of time, which can give you some flexibility of deciding how to invest that money when you receive it, based on market conditions at that time.
Myth #4 – Fixed interest is only relevant in retirement
Take on the risk while you are working and then be cautious in retirement? Not true. Everyone is different and the amount of risk (and therefore allocation to growth investments) you take on at any point in time will depend on your tolerance to market fluctuations and what goals you have set to achieve.
Fixed interest can provide a minimum level of security and can have a large role to play in helping you achieve short-term goals. This leaves riskier/growth investments to aim for longer-term goals, where market fluctuations in the interim period may have less impact on your portfolio.
Myth #5 – The penalties are severe if you need to get your money back in a hurry
Without doubt, some fixed-interest investments (particularly term deposits) do have penalties if you need to withdraw before the end of the term. But not all investments are the same. Some may have a penalty for withdrawing within a short time of commencement, but it may be lower the closer you get to maturity.
Fixed-interest managed funds remove this altogether, as they are tradeable investments, so they need to allow flexibility for investors to come and go all the time.
As with all investment decisions, it’s important to take your time and consider your options. Understand what you are getting into, and where relevant seek the expertise of a professional. Depending on what you are trying to achieve, fixed-interest investments may still be an important consideration in planning towards your goals, even in a falling interest rate environment.
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