Kiwis are ditching term deposits with no end to low interest rates in sight

NZFMA
The FMA has published a new guide to managed funds following research suggesting more New Zealanders are considering alternative investments because of low interest rates.

A further decline in interest rates on bank term deposits is causing more savers to consider alternative investments, the Financial Markets Authority says.

The financial watchdog said a survey of 195 term-deposit holders last month suggested 43 per cent were likely to invest less in term deposits because of low interest rates.

Of those who were considering changing their investment strategy, a quarter were considering shifting savings to managed funds or exchange traded funds, in search of better returns.

Other options investors were considering included directly investing in shares or property, increasing their KiwiSaver contributions, or providing a lump sum for a financial adviser to invest on their behalf.

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The pre-tax interest rates offered by the major banks on term deposits with terms between 4 months and five years were all within a range between 2 per cent and 2.8 per cent on Saturday.

People giving up on term deposits are warned not to invest in anything too risky.
People giving up on term deposits are warned not to invest in anything too risky.

The low-interest rate environment is currently forecast to stretch out as far as global markets can see, with the annual yield on 10-year New Zealand government bonds sitting at 1.1 per cent and the annual yield on even 30-year US Treasury bonds only just bettering 2.1 per cent.

The immediate pressure on rates globally continues to appear to be towards further easing.

Most analysts expect the Reserve Bank of Australia to cut its official interest rate by 25 basis points to 0.75 per cent on Tuesday.

BNZ is offering 2.75 per cent annual interest on six-month term deposits and a 2.6 per cent annual rate on terms of five years.
CHRIS MCKEEN/STUFF
BNZ is offering 2.75 per cent annual interest on six-month term deposits and a 2.6 per cent annual rate on terms of five years.

The BBC on Friday quoted a British Bank of England official speculating it could also cut its official interest rate by 25 per cent basis points, to 0.5 per cent, because of the impact of Brexit uncertainty on the economy, whether or not Britain left the EU with "no deal".

The FMA has developed a new guide to managed funds and exchange traded funds to cater for the heightened interest in alternatives to term deposits.

The 18-page guide provides basic advice, such as noting that managed funds are likely to provide more diversity than exchanged-traded funds but tend to come with higher fees.

It says it is easy to invest in managed funds with a sum as small as $500, and advises reviewing investments at least annually.

Investor capability manager Gillian Boyes said when interest rates fell, it was natural for people start to look for alternatives to term deposits.

She hoped the guide would help people make "more informed decisions".

It was important people "did their homework" and did not chase risky, unregulated investments promising high returns, she said.

If investors are "unhappy" with savings rates, they have alternatives that could help the economy, Reserve Bank governor Adrian Orr said in August.
ROBYN EDIE/STUFF
If investors are "unhappy" with savings rates, they have alternatives that could help the economy, Reserve Bank governor Adrian Orr said in August.

Reserve Bank governor Adrian Orr explicitly hoped investors would change their approach to savings and investments when he announced the bank's 50 basis-point cut to the Official Cash Rate in August.

"If you are just saving and thinking you are going to get the same return year after year after year – that has never been the case and it is not the case," he said.

"If you are unhappy with the return you are getting on savings, it is about thinking what are the alternative investments."

It was people putting their "capital to work" that generated the extra demand that the Reserve Bank was trying to stimulate with its rate cut, he said.

The FMA hopes its guide will help people make "informed decisions".
SUPPLIED
The FMA hopes its guide will help people make "informed decisions".