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    Fixed income and term deposits

    Fixed income and term deposits – a snapshot in time

    If you’re keeping your money in the bank, you are going backwards financially.

    Unless you have committed say $100,000 to a term deposit over a three year period, for instance, you will be looking at an annual interest rate of around 1.5 per cent at the time when the value of your money is dropping by around 1.8 per cent a year.

    If you did lock in that much money for three years you should be able to coax 2.8 per cent a year out of your bank, but then you’re guaranteeing not to touch your money for three years and who knows what could happen to interest rates in that time? If they go up, you are stranded, and they can’t go down very far from current low levels.

    Losing a third of one per cent is not a big annual step backwards but at those fairly miserly deposit rates, you would be well advised to put a lowish cap on the amount of liquid (ready use) cash you have stashed away.

    So, where to invest that money, outside of the equity market?

    One promising avenue for diversification is in the corporate bond market, which until recently was the exclusive preserve of big institutional investors. Corporate bonds are not as safe as government bonds but they have significantly higher yields. Corporate bonds, also known as corporate debt, are issued by companies as a substitute for borrowing from banks and they offer yields that in some cases run as high as 8 per cent a year, although 5 or 6 per cent is more common and generally more highly rated.

    In dividend terms they are much safer to own than shares as the issuer is contracted to pay income, unlike share dividends which can be cut back or stopped at any time.

    Nowadays a number of fund managers have “sliced and diced” tranches of corporate bonds among their clients to offer equity-sized access to that corner of the fixed interest market.

    If things turn bad such offerings actually carry less risk than equities, since bond holders rank ahead of ordinary shareholders in the case of corporate collapse.

    They are less complex than the bank-issued hybrids of a few years ago, which all differ in subtle ways and can be hard to value, and are also much less risky than those debenture offerings you used to see with phrases like “9 per cent per annum” splashed across the front cover.

    Hybrids carry the risk of being dragged down by falling bank share prices, for instance, not to mention being harder to buy and sell than ordinary shares.

    Debentures, meanwhile, have fallen from favour after a series of collapses such as Banksia Securities in 2012, which left 16,000 investors owed around $660 million.

    So, are you looking for an alternative to term deposits?


    By Andrew Main

    This article is the opinion of the author and is not financial advice. Speak to your financial adviser or broker for more information. I’m sure they’ll be happy to help you. Don’t forget to always read the Product Disclosure Statement (PDS) for the active ETF you are invested in. To find out more and to find the PDS please visit