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Weighing up the cash options

Nicki Bourlioufas  |  21 Aug 2017Text size  Decrease  Increase  |  
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With self-managed superannuation funds investing around one-quarter of their assets in cash and with some retail investors holding much more, it's worth examining the returns on different cash investments.


There are several options open to investors, such as bank savings accounts, term deposits, cash management accounts, and managed funds. Another newer option open to cash investors are exchange-traded funds (ETFs).

Managed funds include cash management trusts (CMT) or fixed-income funds, which invest in bank bills and debt securities. The latter can sometimes pay higher interest than savings accounts or term deposits offered by banks, but they also charge management fees.

For example, the BT Westpac Cash Management Trust charges a management fee of 1.06 per cent. Over the year to 30 June 2017, it returned just 1 per cent to investors net of fees, also underperforming its benchmark.

So, you need to ask about fees on any product and check what you're getting back after those fees.

The other thing to note is that while managed funds are more liquid than term deposits, they carry a risk of capital loss and repayment of your capital is not guaranteed, says David Sokulsky, Crestone Wealth Management's chief investment officer.

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In contrast, the Australian government guarantees deposits up to $250,000 in Authorised Deposit-taking Institutions (ADIs) such as your bank, building society or credit union. This means your money is guaranteed if anything happens to the bank, credit union, or building society.

"Unless your net return on a CMT or fixed-income fund is greater than that on a term deposit, particularly given the government's bank guarantee, then managed funds may not really be worth it," says Sokulsky.

"That is what every investor needs to be concerned about, that is, how much you make after fees, or your net return," he says.

Another option often considered by investors is a cash management account (CMA), which is held with a bank (and not a fund manager). A CMA doesn't usually involve management fees, though you may get charged transaction fees.

Like a managed fund and term deposit, some CMA accounts require a minimum investment, which can be between $5,000 and $10,000. Traditional savings accounts typically have no or very low minimum deposit requirements.

According to Ratecity.com.au, the benefit of CMAs is that unlike an online savings account, where it can take days to access your funds, or where you may be penalised if you withdraw early in the case of a term deposit, CMAs generally have faster or immediate accessibility. This is also true of CTAs and fixed-income managed funds.

But CMAs may not offer the highest rates of online savings accounts, which may only pay "bonus" interest, typically between 2.5 per cent and 3 per cent a year, if you don't make withdrawals.

According to Ratecity.com.au, since the introduction of online savings accounts, CMAs have not lived up to the high-yield tag and have become more of a transactional vehicle with a reasonable return.

According to another comparison website, Finder.com.au, the return on CMAs as at 16 August 2017, varied from just 0.45 per cent to 1.5 per cent.

Term deposits also tend to pay better, but again your money isn't liquid. According to the Reserve Bank of Australia, the average return on a one-year bank term deposit was 2.5 per cent in July 2017, while the return on three and six-month term deposits was 1.95 per cent. For one-month deposits, the average rate fell to 1.5 per cent.

In terms of other products, Morningstar's latest ETF Investor Report highlights six new cash, short-term, and floating-rate ETFs. All of them hold A-grade credit ratings, ranging from AA-minus through to A-plus.

Each of these ETFs offer relatively safe spots to park your money and don't need high minimum investments. But like managed funds, you need to take the time to understand the vehicles' underlying assets, which are typically debt securities like bonds, but may also include bank deposits.

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

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