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Written by Matt Kirk Published: May 6 2020 Investments
It stands to reason that the interest rate offered for your Term Deposit should increase as the time to maturity lengthens.
After all, the bank has the certainty of using your money for a longer period of time. And, you take the risk of missing out on an even higher interest rate should interest rates rise further during the time you have
locked-in your funds.
Despite this logic, it’s not always the case. Sometimes you may find that long Term Deposits (over 12 months to maturity) can offer a lower interest rate than 6 month terms. We have the global economy to thank for that. Many developed countries continue to struggle and their governments are lowering the cost of borrowing in a push to boost economic activity. In this case, you may ask why would you hold a longer term Term Deposit?
In fact, there is still a place in an investment portfolio for Term Deposits with maturity terms of 12 months and over.
By investing in a longer term Term Deposit, you are locking in your return in an environment where many expect interest rates to fall further.
You may gain nothing by buying successive shorter Term Deposits in a falling market when you could have earned more from a two-year term.
There is also the role that Term Deposits play as a safe haven investment. An investor may choose to take on more risk in another sector of their portfolio knowing their Term Deposit offsets that exposure with a guaranteed return and the capital protected. In this scenario there can be even more value in locking in a return for a longer period, when the outlook on other investments is far from clear.
Interest rates may not rise for years and could fall further. Longer Term Deposits offer security at a time of uncertainty and the knowledge that on maturity, both principal and return can be withdrawn or reinvested.
Cashwerkz can offer you an opportunity to access a range of term deposit offers from Australian banks and financial institutions. Register now at www.cashwerkzstg.wpengine.com