Term deposit rates falling

According to data from the RBA, the average interest rate on term deposits was 3.4 per cent in September. Meanwhile, the inflation rate sits at 3.8 per cent.

The average interest rate on three-year term deposits dropped to 3.6 per cent in September, down from 3.8 per cent in August and 4 per cent at the start of the year.

Simon Arraj, founder and director of private credit investment manager Vado Private, said that cash isn’t as safe of an investment as some may believe, cautioning investors before going down this avenue.

“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 self-managed superannuation funds (SMSFs) are still allocating a significant proportion of their wealth to cash and term deposits,” said Arraj.

“For many investors, 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.

“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.”

Despite the trouble around inflation and a rising cost of living, household wealth grew by 1.5 per cent in the June quarter, hitting a record high of $16.48 trillion.

Of this total, 10.4 per cent or $1.72 trillion was in cash and deposits. Meanwhile, property assets totalled $11.22 trillion as of 30 June 2024, said Vado Private.

“Official household wealth data reveals that close to 80 per cent of Australians’ household wealth is now invested in low-yielding residential property assets and cash savings, so it would be prudent for Australians to diversify into other asset classes to lessen the risk of their wealth being eroded by inflation,” Arraj said.

“Those are very attractive returns for investors. Private credit funds can deliver consistent and reliable income, with returns driven by corporate and real estate-backed loans, which have benefited from higher interest rates given interest rates on such loans are typically floating coupons or linked to official interest rates. For income-seeking investors who are willing to take on more risk than that involved with cash or term deposits, private credit investments can deliver investors much higher yields.

“However, 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. However, Australians need to be aware of 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.”

[Related: SMEs cautioned against ‘too good to be true’ investment opportunities]

Jack Campbell is the editor of Broker Daily. After graduating from the University of Wollongong in 2022, Jack began his journalistic career working on Broker Daily’s sister brand, HR Leader. In August 2023 he was made the news editor and worked alongside some talented journalists writing articles and recording podcasts.

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