Weighing up cash deposits
Cash in a deposit account doesn't necessarily equate to safety. That's why many investors are shifting to fixed interest securities.
.
By any measurement, $2.8 trillion is a lot of money.
Expressed another way, it’s $2,800 billion. And it’s also the amount of money – according to Australian Prudential Regulation Authority data from January 2023 – that’s being held in millions of deposit accounts provided by Australian banks and other authorised deposit-taking institutions.
Separate data from the Reserve Bank of Australia shows that, of the total, roughly $1.6 trillion is being held in transaction accounts.
These are typically ordinary savings accounts providing people (and organisations) with quick access to their money.
A further $1 trillion is in non-transaction accounts – accounts such as term deposits, where you receive a fixed income return for effectively locking your money away for a set period of time.
For the most part, cash held in savings accounts is used for general living and discretionary expenses – to pay for mortgages, rent, food, and other everyday costs.
On the other hand, cash held in term deposit accounts can readily be classified as an investment.
It’s generally put there for periods ranging from six months to anywhere up to five years to earn a higher return than a savings account would earn if the cash was retained over the same period.
The pros and cons of cash
There is a common misconception that cash is a risk-free asset. It’s not prone to daily market volatility like shares are. As noted above, cash in a savings account is also liquid – you can generally get your hands on it quickly and easily.
Furthermore, cash savings up to $250,000 per account holder (including SMSF trustees) on deposit with an Australian authorised deposit-taking institution are guaranteed by the Commonwealth in the event the institution fails.
Yet, cash does have inherent investment risks. Firstly, a decade of record-low interest rates has meant that cash as an asset class has delivered an average annualised income return of just 1.9 per cent since 2012.
That’s lower than any other major asset class. Worse still, after taking high inflation levels into account, real cash returns have been negative for some time.
Bonds as an alternative
Investors wanting to explore other ways to invest their cash, outside of vehicles such as fixed term deposit accounts, may be interested in considering fixed interest securities.
In everyday financial language they’re referred to as bonds.
Bonds are securities issued by governments or companies that they use to borrow money.
Investors buying bonds can expect to receive full repayment of their principal if they hold it until maturity, as well as steady regular interest payments until then (similar to a term deposit).
As such, bonds are generally considered a lower-risk type of investment than shares, which can’t offer any expectations to investors of either full repayment or a steady income stream and which are usually more prone to market volatility.
Likewise, being slightly higher-risk than cash, bonds are generally expected to outperform cash over the long term.
What’s clear is that a growing number of investors worldwide are using their cash to take advantage of higher-returning, relatively low-risk, high-grade bonds, especially government-issued bonds.
That’s showing up in a range of other data, including statistics from the Australian Securities Exchange (ASX) covering monthly inflows into ASX-listed exchange traded funds ETFs that invest in Australian and international bond issues.
ETF bond funds can readily be bought and sold by anyone in the same way as listed shares, simply through any ASX-linked trading platform.
In the latter half of 2022 investment inflows into ASX-listed bond ETFs ($2.2 billion) actually exceeded the inflows into ASX-listed Australian shares ETFs ($1.6 billion) – that’s rare.
What’s attracting investors into bonds?
Three main factors have led to the increased, and accelerating, inflows into bond products around the world.
1. Higher interest rates
Rising interest rates have lifted the yields available to investors on new and existing bond issues. That makes bonds more attractive to investors seeking higher steady income streams.
Vanguard forecasts global bonds to return 3.9-4.9 per cent and domestic bonds to return 3.7-4.7 per cent over the next decade.
2. Higher capital growth
Once inflation levels fall back, it’s likely that central banks will start cutting interest rates.
Lower interest rates will likely translate to higher bond trading prices. This is another key attraction for fixed income investors with a longer-term horizon.
3. Improved portfolio diversification
Lastly, the traditional role of bonds in investment portfolios is to provide asset class diversification to help smooth out total investment returns over time.
While bonds do not generally outperform riskier asset classes such as shares over the long run, they typically have a more stable return profile because they are not prone to the same level of market volatility.
Expect to see more investors use bonds to capitalise on higher interest rates, lower bond prices, and the potential price upside from markets.
This may see a reduction in the relatively high amount of cash currently being held by many investors in low-yielding financial institution accounts.
Tony Kaye, Senior Personal Finance Writer
vanguard.com.au
Latest Newsletters
Hot Issues
- Getting to a higher level of financial literacy in Australia
- What is the future of advice and how far off is superannuation 2.0?
- Investment and economic outlook, April 2024
- Australia’s debt service ratio ‘extraordinary’: CBA
- Connecting an adviser with your children
- ACCC scam report
- The Shortest-reigning Monarchs in History
- ATO warns trustees about increasing crypto scams
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
- The 2025 Financial Year Tax & Super Changes You Need to Know!
- Investment and economic outlook, March 2024
- The compounding benefits from reinvesting dividends
- Three things to consider when switching your super
- Oldest Buildings in the World.
- Illegal access nets $637 million
- Trustee decisions are at their own discretion: expert
- Regular reviews and safekeeping of documents vital: expert
- Latest stats back up research into SMSF longevity and returns: educator
- Investment and economic outlook, February 2024
- Planning financially for a career break
- Could your SMSF do with more diversification?
- Countries producing the most solar power by gigawatt hours
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- Quarterly reporting regime means communication now paramount: expert
- Plan now to take advantage of 5-year carry forward rule: expert
- Why investors are firmly focused on interest rates
- Super literacy low for cash-strapped
- Four timeless principles for investing success
- Investment and economic outlook, January 2024
- Wheat Production by Country
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
April - June 2023 archive
- Australians Seek Financial Independence – Report
- Summary of Superannuation Issues and Recent Changes
- Legislation changes give market-linked pensions better outcome
- Inflation drives the cost of retirement to a record high
- Banking on the Age Pension
- The keys to high retirement confidence
- The strong link between advice and retirement confidence
- Top 50 Greatest Inventions in History
- Unintended consequences of work test changes to be rectified
- Banks launch scam awareness campaign
- ATO warns of rise in SMSF identity fraud and investment scams
- The importance of SMSF succession planning
- Our investment and economic forecasts, April 2023
- Overview of the Federal Budget 2023 – 24
- 2023 Federal Budget: Stronger foundations for a better future
- Australian retirees face accelerating price pressures
- Protect your business from cyber threats.
- Devil in the detail on super changes
- More women take up SMSF as others look for advice
- More SMSF members accessing funds without meeting conditions: ATO
- How Long Could You Survive Drinking Only .........
- Weighing up cash deposits
- Bank closures, market volatility call for perspective