The interest rates on term deposits are on average below the level of inflation, effectively wiping out any real returns to cash investors, and with rates likely to fall further, SMSFs should consider looking at other fixed-income investments, a private credit investment specialist has stated.
Vado Private founder and director Simon Arraj pointed out that according to Reserve Bank of Australia data, the average interest rate on term deposits across all maturities was 3.4 per cent in September, down from 3.5 per cent in August and under the 3.8 per cent June quarter inflation rate.
The average interest rate on three-year term deposits was also below the inflation rate, falling to 3.6 per cent in September following a months-long decline from 4 per cent at the start of the year.
“The big banks are paying less on term deposits now than they were at the beginning of the year. If that trend continues, we could see average term deposit rates falling below 3 per cent by the year’s end,” Arraj said.
“We have seen a sharp decline in government bond yields, or market interest rates, following the drop in interest rates in the US. Yet Australian households and SMSFs are still allocating a significant proportion of their wealth to cash and term deposits.
“Cash might seem like a safe-haven investment. In reality, cash at bank is not offering investors much of a safety buffer, with the real return on many term deposits now less than zero.
“For this reason alone, it may pay Australian investors to wind back their record levels of investment in cash and instead allocate some of that funding to higher-yielding fixed-income investments, such as private credit, to reap a higher return on their money.”
Data from the Australian Bureau of Statistics indicated cash and deposits represented 10.4 per cent of the total net worth of Australian households, while property assets represented 68.1 per cent and as such it would be sensible to diversity into asset classes to offset the impact of inflation, he noted.
He said private credit funds tend to deliver returns in the 8 per cent to 12 per cent range, driven by corporate and real estate-backed loans, which are tied to higher interest rates set by floating coupons or official interest rates, but cautioned they should not be used as a simple cash substitute.
“Investors need to assess their financial needs before investing in any new asset class. Private credit investments offer potential benefits such as higher returns, flexibility and diversification, which can be very attractive compared to the low returns of cash investments,” he said.
“However, Australians need to be aware that private credit is less liquid than cash so it can be difficult to quickly convert these investments to cash. This is a significant difference compared to cash. Yet, most Australians have room in their portfolios for a greater allocation to fixed-income assets.”
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