Despite record low interest rates, many Australians continue to invest in low risk assets such as term deposits or savings accounts, rather than in higher risk investments.
According to AMP Capital director for Australia and New Zealand, Craig Keary, some Aussies may be happy to get an investment return which is only slightly more than the record low cash rate of 1.75% (as at 8 June, 2016), if it means they can get a guaranteed income.
In this article, we look at the different types of investments that might suit you in this low interest environment and what you need to consider.
Snapshot of investment types
Cash investments, such as savings accounts and term deposits, attract conservative investors and those who are parking the cash they need to fund their lifestyle. Term deposits offer assurance to investors who want to know exactly how much they’ll receive after a set period of time. They are often available as investment options within your super fund and within allocated pensions.
Fixed income investments, such as bonds, allow you to indirectly lend money to an entity (such as a company or government) to invest for a certain amount of time at a fixed or variable interest rate. They are considered low risk, but should offer a higher rate of return than cash investments because of the longer-term maturity structure and the fact there is some risk of non-repayment by the borrower1.
Managed funds are where your investments are pooled with other people’s money and invested by an investment manager to create income (or distributions) which you receive at set times, as well as capital growth. You can invest in just one asset class or diversify your investments across a range of asset classes to spread your risk.
Property investment for both owner occupiers and investors can be a profitable, long-term investment. However, increased demand for housing in Australia has pushed up prices (beyond rents and incomes); resulting in a potentially higher investment risk if the market starts to soften2.
Shares or equities are investments in companies, usually bought through brokers or online stock broking services. They are exposed to daily movements in market prices. If the company whose shares you have goes bust, the shares could fall to zero value3. They are considered to be a higher risk than some other investment types.
What are the best investments when interest rates are low?
There are no perfect answers to this question. It really comes down to the level of risk you are prepared to take and what you’re comfortable investing in. Knowing your short, medium and long-term goals4 and understanding that investments are subject to ongoing market fluctuations and investment cycles is important.
AMP Capital’s Head of Investment Strategy and Chief Economist, Dr Shane Oliver says: “In searching for a higher yield, investors need to keep their eyes open. It’s critical to focus on opportunities that have a track record of delivering sustainable and attractive dividends that grow over time and that are not based on significant leverage. In other words, make sure the yields are sustainable”.
Want to know more?
If you still feel like you need to know about how and where to invest, we suggest you speak to a financial adviser or call us on 131 267. We’re here to help.
Millions of people are turning to advisers to improve their financial outcomes