Savers must weigh up risks in chase for yield
In these times of record-low interest rates, savers need to be careful about placing their cash into investments promising higher returns – unless they are prepared to put their money at risk.
The official cash rate is 0.75 per cent and likely to go lower early next year. That is likely predisposing some savers to take more risks with their savings.
Savers need to be careful thinking they can get a higher yield without taking on additional risk to their capital.Credit:Shutterstock
Those who monitor online savings account interest rates and are prepared to shift their cash between bank accounts regularly can probably earn close to 2 per cent on the money. However, term-deposit rates with major lenders are at 1.5 per cent, or less, on periods of up to two years.
It is still possible to obtain more than 2 per cent interest by going to a smaller, online-only provider, or locking away your money for a longer time period.
The interest rates on offer are a pittance compared to historical levels but at least there is no risk to capital. That's because the first $250,000 on deposit with an “authorised deposit-taking institution” – such as a bank, mutual bank, credit union or building society – is protected by the federal government's deposit guarantee.
Those with small savings or who are saving for only a short period have little choice but to keep their cash on deposit, despite the poor rates on offer.
However, those with larger savings could look at diversifying and taking some risk with a portion of their capital, in the expectation of higher returns.
People who do not need to access the money for some time could invest a part of their savings in Australian shares, as long as they have the time to ride out any setbacks in the sharemarket.
Australian shares pay a yield, on average, of about 4.5 per cent and, over the longer term of at least five years, there is every likelihood of capital gains, too.
Add in the benefits of franking credits and the "grossed-up yield" on some shares is more than 6 per cent, depending on the income-tax bracket of the investor.
However, just because a company's shares have a high yield does not always make them a good investment.
The shares could have a high yield because the share price has fallen, as investors take a dim view of the future prospects of the company.
Exchange Traded Funds (ETFs), which are listed on the Australian sharemarket, are a good way of obtaining instant diversification. They track all sorts of markets, including Australian shares, and by their definition cannot go broke.
Another option in the hunt for yield is peer-to-peer lenders. They are usually online platforms that charge borrowers lower rates of interest than they would pay on bank loans, while lender-investors earn higher interest than they could get with a bank term deposit.
The best course of action depends on individual circumstances. If in doubt, seek some professional financial advice.
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