Term deposits

Term deposits are an important part of your Cash and Fixed Income investment strategy.

Term deposit investors typically want simplicity, safety, security and certainty in their investment return, and would like to ensure protection of their capital.  However, they also want to earn a better return than generally available in cash, and are prepared to have their investment locked up for longer terms.

For many, term deposits are also a great way to protect their cash against the rising tide of inflation, and also generate regular income.

Tips for choosing the best term deposit for you:

1. Make sure you choose the right term. Review your need for liquidity to ensure that you do not need to break the term deposit early. Alternatively, invest smaller a amount or invest for a shorter term.

2. Check the terms and conditions. Make sure you are familiar with the conditions of the investment and also understand whether any early termination fees are payable and how much it might cost.

3. Understand how interest is calculated. Plan your cash flows and understand your future need for cash and liquidity. Make sure that the interest payment options you select are appropriate.

4. Check the credit rating of the ADI offering the term deposit and make sure you are comfortable with the institution you are investing in.

There are several ways to use term deposits as part of your overall investment portfolio:

• Using term deposits to supplement your income

• Laddering

• Bullets

Read how these strategies can be used in different ways to assist with planning cash flow, taking advantage of market upswings and maximising your savings for that big ticket item you may be saving for in the future.

Benefits of a bullet strategy

• Allows you to invest in more attractive, long-term term deposits

• Allows you to take advantage of increasing interest rates during an upswing

• Helps plan savings that are driven by time goals

• Encourages long term and regular savings habits

• Keeps your money locked up until you really need it for that big purchase

• Lowers risk of holding a single investment for a longer period of time

• Reduces impact of interest rate fluctuations

• Helps to minimise inflation risk

• Encourages long term and regular savings habits

• Creates liquidity

• Allows you to invest in more attractive, long-term term deposits

• Allows you to naturally take advantage of moves in the yield curve

• Delivers regular income and steady returns

• Helps avoid early termination penalties

• Lowers risk of holding a single investment for a longer period of time

In a three year ladder strategy, a customer invests $75,000 in three equal portions into three different term deposits: $25,000 into a three year term, $25,000 into a two year term, and $25,000 into a one year term. After the first year, the first $25,000 term deposit will mature, and the remaining $50,000 will have a year less on their term to maturity. The investor will place the funds from the first matured term deposit into a new three year term deposit.

In this strategy, a term deposit will mature each year, and be reinvested into another three year term deposit. Investors can often reap the benefit of higher interest rates in the longer term deposits, but have the benefit of not having to lock their entire investment into one term and one rate.

If having deposits maturing annually is too long for your needs, then you can arrange to invest in term deposits every six months or even quarterly or monthly if that's how you'd like them to mature in the future. The same principle then applies with each maturity and on each occasion, you invest for another three years, and extend the term of your maturing term deposits by a year.

If an annually maturing term deposit ladder is too long for your needs, then you can arrange to invest in term deposits every six months, quarterly or even monthly if that's how you'd like them to mature in the future.

Often investors choose this option when saving towards a certain time-oriented goal, such as buying a house.

How do bullets work?

In this strategy, a time goal guides the process. Investors will stagger purchases of term deposits, all of which mature at around the same time. By purchasing term deposits at different times, investors reduce the risks of missing out on higher interest rates during an upswing period when official cash rates are tipped to start rising.

For example:
In a five year bullet strategy, a customer invests a portion of their $75,000 in a five year term deposit, leaving the balance in a high interest savings account.  Each month as rates fluctuate, the best rate can be invested in with the remaining portion of the $75,000, until the entire $75,000 is invested.

With all term deposit strategies, investors must keep in mind current and future cash needs. With RaboPlus term deposits, you can choose when to have interest paid to you on terms of one year or more, so this helps you manage your cash flow needs while still benefitting from higher longer term  interest rates.

For example

Investing $100,000 in a RaboPlus five year term deposit, with monthly interest payments, could earn an estimated $562.50 per month at an interest rate of 6.75% p.a.

Use our calculator to work out how much your interest payments can be based on your nominated principal amount, term and interest payment option.

The Australian Securities and Investments Commission's (ASIC's) website FIDO provides investors with an online guide on how to make the most of your term deposits.

Visit the Australian Prudential Regulation Authority for a list of authorised deposit taking institutions (ADIs).