Keep it safe ? in cash

If the pitching and rolling of the sharemarket is making you feel a little queasy, you may want to consider placing some of your capital into cash for the time being. Five years of 20% returns have made investors complacent about risk and now it’s time to pay the piper.

The good news is that cash offers relatively strong risk-free yields –up to 8% in some fixed-term products. Dennis Orrock, the general manager of Infochoice, a free financial services comparison service, says: “Investors are going to become very interested in fixed interest products such as debentures but you really need to know what you are putting your money in. Once again cash has become very competitive.”

What's more “at-call' cash is not your only option. If you don’t need immediate access to your money you may want to consider a term deposit. And in periods of sustained volatility an incentive to just leave your cash alone may have a significant payoff. But to start, let’s look at the merits of the at-call cash account.

The most important feature is the headline rate, but with risk on your mind you might be tempted to go with one of the big banks, which is not necessarily a good strategy. Orrock says: “If anything, you would probably we looking outside the big four to make sure you are getting the best return. You would certainly be looking at banks like Rabobank, BankWest or ING, which all offer high-yielding at-call cash accounts.”

Another aspect to consider is how quickly you may need access to your cash. Some investors prefer the convenience of instant transfers, which generally are only available when you open a transaction account to complement your high-yielding at-call cash account. Transfers between some at call accounts and your regular transaction account can take one or two working days.

Jeremy Ooi, a financial analyst with consumer finance research house Cannex, says: “Often banks will want to make sure you open a transaction account in conjunction with an at-call cash account. But you may be charged for this and you may not need instantaneous transfer, so watch out for that.”

A combination of deregulation and new technology has produced many of the advances we see today in the market for online cash accounts. But they are also the catalyst behind a resurgent market for term deposits, which offer greater returns but slightly less flexibility. And in the future this gap might widen even further.

Jeremy Ooi explains: “Term deposits appear to offer almost the same rate as at-call cash accounts but they generally offer about 20 basis points, or 0.2%, more interest. Term deposits are becoming more popular with the banks too because it’s cheaper to get money from customers than it is from the wholesale market. The money market rates are getting pretty high now.”

In the past, you might have been able to identify the term deposit account holder on sight. You might catch them on the train with passbook in hand, heading toward the CBD to visit the only accessible state branch of XYZ Credit Union. With the proliferation of online banking, that’s no longer the case. Today you should be more concerned with reputation of an institution than its physical location.

Leading foreign banks such as ING Direct (a subsidiary of a Dutch bank ING Group), BankWest (a subsidiary of a Scottish bank HBOS) and Rabobank (a subsidiary of Holland’s Rabo Group) have balance sheet strength equal to any Australian bank.

The headline rates of term deposits depend on two factors. First, the length of the term. Term deposits are generally available in one, three, six, nine and 12 month increments, with higher rates available for the longer terms. Additionally, rates also increase in line with the amount of capital you commit, up to $100,000.

n$10,000 Term: 30 days					n$10,000 Term: 1 year
Rank	Company	Nominal Rate (%)	Effective Rate (%)		Rank	Company	Nominal Rate (%)	Effective Rate (%)
1	Macquarie Bank	6.99	7.2183		1	Credit Union Australia	7.50	7.7633
2	Arab Bank Australia	6.75	6.9628		2	Macquarie Bank	7.70	7.70
2	RaboPlus	6.75	6.9628		3	Sandhurst Trustees	7.45	7.6607
4	Members Equity Bank	6.60	6.8034		4	Bank of Queensland	7.55	7.55
5	ING Direct	6.50	6.6972		4	Home Building Society	7.55	7.55
6	Goldman Sachs JBWere	6.45	6.6441		6	Bankwest Direct	7.30	7.5493
7	Bank of Cyprus Australia	6.40	6.5911		6	St George WA	7.30	7.5493
7	Laiki Bank	6.40	6.5911		8	ING Direct	7.50	7.50
9	Hibernian Credit Union	6.20	6.3793		8	RaboPlus	7.50	7.50
10	myState Financial	6.00	6.1678		8	Suncorp Direct	7.50	7.50
10	University Credit Soc	6.00	6.1678		8	United Credit Union	7.50	7.50

While 12-month term deposits are currently offering the best returns you may not want to be tied to a 12-month term. Orrock says: “You need to keep in mind that in an environment of rising interest rates you probably don’t want to put your money in a term deposit. But if you are looking at a short term one, such as 30 days or even shorter, you can get some good prices.”

n$50,000 Term: 30 days					n$50,000 Term: 1 year
Rank	Company	Nominal Rate (%)	Effective Rate (%)		Rank	Company	Nominal Rate (%)	Effective Rate (%)
1	Macquarie Bank	6.99	7.2183		1	Credit Union of Australia	7.50	7.7633
2	Suncorp Direct	6.83	7.0479		1	NSW Teachers CU	7.50	7.7633
3	Arab Bank Australia	6.75	6.9628		1	St George WA	7.50	7.7633
3	RaboPlus	6.75	6.9628		4	Macquarie Bank	7.70	7.7
5	Laiki Bank	6.60	6.8034		5	Sandhurst Trustees	7.45	7.6607
5	Members Equity Bank	6.60	6.8034		6	SUNCORP	7.60	7.6
7	Bank of Cyprus Australia	6.50	6.6972		7	Bank of Queensland	7.55	7.55
7	Electricity CU	6.50	6.6972		7	Home Building Society	7.55	7.55
7	ING Direct	6.50	6.6972		7	Railways Credit Union	7.55	7.55
7	United Credit Union	6.50	6.6972		10	Bankwest Direct	7.30	7.5493

Keep in mind that if you do want to draw your money out early then you may be penalised, which at worst means sacrificing the interest generated during the agreed term and at best it means being paid an average for the period at a much lower rate.

n$100,000 Term: 30 days					n$100,000 Term: 1 year
Rank	Company	Nominal Rate (%)	Effective Rate (%)		Rank	Company	Nominal Rate (%)	Effective Rate (%)
1	Maitland Mutual BS	7.05	7.2823		1	Credit Union Australia	7.50	7.7633
2	Newcastle Permanent	7.00	7.229		1	St George WA	7.50	7.7633
3	Macquarie Bank	6.99	7.2183		3	Macquarie Bank	7.70	7.7
4	Suncorp Direct	6.83	7.0479		4	Maitland Mutual BS	7.45	7.6607
5	Arab Bank Australia	6.75	6.9628		4	Sandhurst Trustees	7.45	7.6607
5	RaboPlus	6.75	6.9628		6	SUNCORP	7.60	7.6
7	Laiki Bank	6.70	6.9096		7	Bank of Queensland	7.55	7.55
8	Bank of Cyprus Australia	6.60	6.8034		7	Home Building Society	7.55	7.55
8	Members Equity Bank	6.60	6.8034		7	Hunter United Credit Un	7.55	7.55
10	Citibank	6.57	6.7715		7	Newcastle Permanent	7.55	7.55

But there are exceptions to the rule. In some cases you may find that headline rates for 24 and 36 month term deposits are lower than for a 12-month deposit. This reflects the uncertainty in the market and is a good hint of upcoming economic instability. But alert bargain hunters will always be able to grab a good deal.