Learn the basics about your Kiwisaver fund
If all the newspaper columns dedicated to KiwiSaver were laid end to end, they would stretch the length of the North Island.
I made that up, but you get what I mean – there have been a lot.
And that sheer, awesome volume of erudite KiwiSaver coverage must be the reason 62 per cent of people interviewed by Massey University admitted they didn’t do any more than skim-read the material their KiwiSaver provider gave them while 8 per cent didn’t read it at all!
It’s more likely the majority of us lack the attention span, higher degree in financial jargon and access to illegal amphetamines, needed to get through the written material sent to us.
The report also said one in five people didn’t know what kind of KiwiSaver fund they were in, and I think it’s a fair bet a whole heap more don’t really have a tremendous grasp of the kind of fund they are in, even if they do know the name of it.
So here’s my guide to get to grips with the most basic of differences between the three biggest broad categories of KiwiSaver fund: Conservative (including the default funds), balanced and growth.
The first thing to know is that all three are run by fund managers taking fees to pay them their six-figure salaries. The more your fund is aimed at growth, the higher the fees.
All contain a mixture of three kinds of assets – cash, bonds and shares.
Cash is a word that stands for short-term deposits mainly in banks.
Bonds are IOUs issued by companies and bodies like governments which need to borrow from investors.
Those borrowers pay interest to the bondholders and
Don’t be passive. Make choices and know why you made them Read what you are sent Seek knowledge, ask questions. promise to give their money back at a certain date.
Shares record the legal ownership of a proportion of the company that issued it, and a right to share in earnings handed out as dividends.
All carry risk. The bank could go bust. Shares can lose value. Companies can run out of money to pay the interest or also go bust.
For this reason, funds hold many shares and bonds from different companies and bor- rowers and spread cash around banks to reduce the risk of losing all the money.
Risk becomes something more akin to what you might call volatility.
You can think of this as the bumpiness of the ride, the chance in any one year of a big loss, or gain in value.
Conservative funds hold lots of cash and higher-rated bonds. The chances of them losing value (ie, the banks going bust and the bonds not getting paid back) is low. If you invest in a conservative fund you are in for the equivalent of the steady-asshe goes riverboat ride.
Balanced funds hold more bonds, more shares and less cash, so the chances of bigger rises in value and bigger falls in any year are higher. This is a choppier river experience with dips and troughs.
Growth funds hold mostly shares. This is kayaking on a river with occasional whitewater. There will be ups and downs, though over the long haul, a growth fund should typically beat the return on conservative and balanced funds.
Figures on the excellent Sorted.org.nz website suggest there is a one in 13-year chance of conservative funds making a negative return, rising to one in seven for balanced funds and one in five for growth funds.
Next week, my subject will be how to use this knowledge to pick a KiwiSaver fund.