Macquarie Cash Solutions: Cash 101: Investing your assets in cash

Transcription

1 Macquarie Cash Solutions Macquarie Cash Solutions: Cash 101: Investing your assets in cash Macquarie Adviser Services

2 Table of Contents 01 A tangible asset 02 What are the options? 04 Rates of return 06 The yield curve 08 A good time to seek advice Published May 2008 This general advice has been prepared by Macquarie Investment Management Limited ABN AFSL (MIML) and does not take into account your objectives, financial situation or needs. Before acting on this general advice you should consider whether it is appropriate to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. Macquarie Investment Management Limited ABN AFSL (MIML) is not an authorised deposit-taking institution for the purposes of the Banking Act (Cth) 1959, and MIML s obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN or of any Macquarie Group entity. Neither Macquarie Bank Limited nor any member of the Macquarie Group guarantees or otherwise provides assurance in respect of the obligations of MIML.

3 A tangible asset Cash products provide a great way to actively manage your cashflow, and can also be a valuable component of your overall diversified portfolio. But with the diverse range of cash management, savings and investment accounts available, all offering different benefits and rates of return, it s not always easy to know which is best for you. 1

4 What are the options? Cash solutions come in all shapes and sizes. Each one is designed to offer different benefits so there s no one-size fits all solution. As a result, many people have more than one cash account you probably have a number of accounts yourself. As a general rule, cash solutions have two common features. They: pay you interest in return for you depositing your money; and pay back the amount that you deposit, either on demand or within a set period of time. Here s a rundown of some more common cash accounts. Transaction accounts This is your day-to-day at-call account which generally offers low or no interest. Use them for your everyday expenses, your bills Online saving accounts These accounts typically feature online-only access, which helps keep the interest rate high, but usually means that they must be linked to a transaction account. Use them for regular contribution savings that you require at-call access to. 2

5 Term deposits Your money is invested for a set period. They are low functionality, but tend to offer a better interest rate over the duration of the set term than you may receive from other day-to-day bank accounts. Use them for parking a lump sum that you don t need access to for the set term. Cash management accounts and trusts These are the investor s option. They provide a cash hub to help you manage all of your cash flow, including investments. Cash management trusts (CMTs) pool investors money into high-yielding money-market instruments that are normally only available to professional investors, while cash management accounts (CMAs) are individual bank accounts. Cash management accounts and trusts often have a higher minimum investment, such as $5000. Use them for managing your investment returns and cash flow. The return you receive on your deposit or investment will depend on the type of account you choose and the interest rate available on that account. Interest rates may fluctuate according to market conditions, or may be fixed for a set term. 3

6 Rates of return Why do interest rates change? The Government uses interest rates to assist in managing the economy. Official interest rates are set by the Reserve Bank of Australia (the RBA), which meets on the first Tuesday of each month to decide whether or not to raise or lower official interest rates. Mortgages provide a great example of how this impacts the general public. When interest rates rise, people with mortgages have less disposable income, which helps to slow the economy. Conversely, when interest rates fall, mortgage holders have more disposable income, which can help support the economy. Interest rates also affect other areas of the economy like exchange rates and exports. Fluctuating interest rates make the differences between cash options even more pronounced. 4

7 The impact of interest rates on cash returns Cash hubs, accounts and trusts all react differently to interest rate adjustments. For example, a 0.25% cut in official interest rates might result in a CMA s interest rate reducing by a similar amount, but only a minor reduction in rate for a term deposit. This is because term deposits rates have to take into account where the official interest rates are likely to be in the future, and therefore the rate will probably have already reduced prior to the RBA announcement. The following table gives a summary of how returns from different cash solutions are likely to be affected by interest rate changes. Interest rate Transaction accounts Typically low or zero interest. Online Savings Account (OSA) Typically offer a higher return than CMAs and CMTs, due to lower costs associated with managing an internetbased account. Term Deposits (TD) Returns are directly linked to the duration of the term. Generally they are higher than the RBA cash rate^. Cash Management Account (CMA) CMA rates are set by each provider. Typically a margin below the RBA s cash rate. Cash Management Trust (CMT) Dependant on the weighted average return from securities or deposits held by the trust. Over the long term, rates are typically equal to the RBA cash rate, less management costs and other costs. Impact of interest rate changes on the returns Low returns expectation so little affect. Returns will commonly rise and fall in line with changes in interest rates. Returns are locked in for the agreed term. Changes in RBA interest rates only affect the rates being offered on new TDs. Returns will commonly rise and fall in line with changes in interest rates. May not have an immediate impact on CMT returns as the overall return is determined by the underlying securities, which can have a variety of maturity dates. Access to funds At call. Via transfer to an every-day account. At maturity date. Typically at call. Varies, but often at call. ^ Speak to your financial adviser or see for more information on the RBA cash rate. 5

8 The yield curve Generally speaking, the longer you re prepared to lock away your money, the higher the interest you will earn on your money. However that isn t always the case. Term deposit rates are set by banks based on the yield curve a benchmark for the expected cost of debt (i.e. interest rates) over the next 0 2 years. Figure 1 Yield (%) Normal yield curve Months to maturity Rate 6

9 A normal yield curve (example shown in figure 1) is a gently rising line. It assumes a growing economy, with the expectation that interest rates will increase in the future. As a result, investors in longer-term deposits are rewarded for locking away their money for a longer period of time. Leading into a slowing economy or recession, the yield curve can become flat or even inverted (example shown in figure 2). An inverted yield curve means interest rates are expected to decrease in the future. That means investors can expect higher yields from shorter-term deposits. Figure 2 4 Inverted yield curve Yield (%) Months to maturity Rate 7

10 A good time to seek advice Changes in interest rates can have a significant impact on the yields from cash products making it extremely important to review your cash position in light of recent events. With the help of a financial adviser, you can also look at your cash investments in the context of your whole portfolio, helping you to stay on track to meeting your long-term financial goals. Cash Kings For tips on saving and budgeting and information on major investment types, see the FIDO section of the ASIC website at Financial planners and accountants can help you to structure your finances in ways that help you achieve your short and long-term financial goals. If you have any questions or require more information, we recommend you speak to your financial adviser. Declining interest rates have changed the landscape for cash investments, making it a good time to review the role of cash in your portfolio. 8

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12 FLY2524 CL 05/09 If you have any questions or require more information, please speak to your financial adviser