Nick Bruining: With deposit rates set to rise, banks look safer bet than risky investments in uncertain times

While borrowers will be anxiously awaiting tomorrow’s Reserve Bank decision on interest rates, investors will be topping up their glasses of Melbourne Cup bubbly at the prospect of higher earnings. Some savings accounts could be paying close to 6 per cent by the end of the week. A number of online savings accounts are currently offering rates above 5.5 per cent, with Rabobank paying 5.6 per cent on its High Interest Savings Account. This applies to new individual customers for the first four months, up to a maximum of $250,000. It then reverts to 4.2 per cent. This money is available at-call and does not need to be locked away for the 5.6 per cent rate to apply. Rabobank accounts, like all banks operating in Australia, are backed by the Federal Government’s Financial Claims Scheme, which guarantees the first $250,000 per account holder per institution. A couple with $500,000 to invest could each invest $250,000 in an account and access the higher rates while knowing their money is safe. Assuming the money is left alone for the four-month introductory period, the total interest paid would be $9333. Financial planners are urging cautious investors to reconsider income-generating strategies that became popular over the past few years. “Over the past 10 years or so, we saw some investors chasing income forced to sacrifice capital safety for higher returns by using riskier investments,” said independent financial adviser Chris Cornish. “Sometimes, the risk is easily understood, like an investment in blue chip shares.” Commonwealth Bank shares, for example, showed a dividend yield of 4.67 per cent last week. That means a person who bought a CBA share last week for about $96.50 could expect a pre-tax return of 4.67 per cent if last year’s dividend was repeated. However, the dividend yield of a share is a moving feast, because the share price and dividends are constantly changing. “Other times, the investment risk isn’t so obvious. Some income funds market themselves like bank accounts using bank-type terminology, but aren’t,” Mr Cornish said. Income funds are often linked to the real estate sector. They lend investors’ money to property developers, property investors and homebuyers. These funds rely on those borrowers repaying their debts on time and in full to ensure that the invested capital is ultimately repaid to mum-and-dad investors. There are no government guarantees on any of the money invested by individuals. “While there’s nothing to suggest any immediate problem, history is littered with funds that ran into difficulties,” Mr Cornish said. “It’s usually triggered when lots of people want their money back for whatever reason and the income funds don’t have the liquidity to meet the requests. They are then forced to delay or freeze all payments to investors.” In some cases, investors only got back part of their money and had to wait years for the final instalment. “We’re in a period of some uncertainty in world economies,” Mr Cornish said. “If you’ve just recently come into some cash, there’s nothing wrong with waiting for things to settle down, perhaps buying a few select stocks but picking up 5 per cent or more along the way from bank accounts.”