Understanding Asset Classes: Cash & Term Deposits
Cash is considered to be a capital stable secure asset class – capital invested will be returned.
The liquidity of cash assets varies with some ‘at call’ – where funds invested can be accessed in need, or ‘fixed’ for a term, where an investment is accessible at the maturity of the term.
There are a range of ways for a SMSF to hold cash across a range of products, such as:
Bank accounts or Cash Management Accounts (CMAs)
Often central to managing a SMSF these accounts provide transaction capabilities to receive income and contributions, make payments, such as pensions and expenses and provide for good record keeping by way of a monthly statement. These accounts provide functionality in exchange for a lower interest rate with funds at call.
High Interest Savings Accounts (HISA)
A HISA provides a higher rate of interest at call and is linked to another bank account providing a way to move cash in and out electronically – online and ‘park’ it for a period, earning a higher rate of interest before moving it back to the bank account when needed.
Term Deposits (TDs)
Term deposits provide a way to receive a known fixed rate of interest for a specified term – providing certainty. Typically, terms can run from a few months up to 5 years with interest paid at varying intervals – such as monthly, 6 monthly or annually. Providers may offer the choice of having interest reinvested in the term deposit at maturity or paid into a separate account.
SMSFs could choose to open a number of TDs, for differing amounts each with varying terms and perhaps with varying interest payment periods to accommodate expected cash flow needs as interest is paid.
The setting of interest rates on cash assets can vary:
- Call accounts rates are often set against the Reserve Bank of Australia (RBA) cash rate, sometimes at a margin above the RBA cash rate, that is RBA rate + x%. As the RBA rate moves up or down, the margin remains the same, but the overall rate will change.
- TD interest rates are set by the institution on a needs basis usually to assist in funding lending. Should there be a need to ‘break’ or access the TD before its maturity date, there may be a cost by way of a reduced rate being paid.
Financial institutions in Australia are only permitted to accept deposits if they are an Authorised Deposit-taking Institution (ADI). ADIs are regulated by the Australian Prudential Regulation Authority (APRA) and the Australian Government guarantees deposits up to $250,000 in ADIs such as banks, building societies and credit unions.
Balanced against these security benefits is the risk of receiving returns that will be below that of inflation or being locked into a TD investment at a lower than current market rate.