Many happier returns

If you want to prosper in a time of historic low interest rates, don’t tie up your funds in a bank account, writes Money magazine founding editor, Pam Walkley.

Record low interest rates are great if you’re paying off a mortgage or trying to reduce debt, but for those who need to live off investment income, including retirees, it’s been very hard. Leave your money in the safety of a bank account – where deposits up to $250,000 are guaranteed by the federal government – and your spending power goes backwards. But the alternative, putting funds into shares and other types of investments, incurs more risk.

Having different types of assets, including cash, is the key. Diversifying your sources of income will help to buffer the risks involved.

Retirees not wanting to erode their capital too quickly should consider having some funds in the share market, particularly dividend-rich Australian stocks. It’s important to remember share investing is not short term and you need to use money that you can lock away for at least three to five years.

The Australian market is unique in that many companies pay healthy dividends and also use franking credits, meaning you can do much better than the measly returns from term deposits, the best of which are around 3 per cent.

But for many, choosing the right stocks isn’t easy so it’s worth considering a managed fund, exchange traded fund (ETF) or a listed investment company (LIC) set up to maximise yields.

Russell Investments High Dividend Australian Shares ETF scored the best three-year return, 5.77 per cent a year. And two big dividend-seeking

LICs, Clime Capital Ltd and WAM Capital Ltd, are yielding 5.5 per cent and

6.1 per cent respectively. They’re listed on the Australian Stock Exchange (ASX), which means ETFs and LICs are very liquid and you only need $500 to invest.

There’s a lot more choice with managed funds, but complications of buying and selling them can be a turn-off. Some fund managers have ASX-listed versions of their funds, called mFunds, and there are far fewer of these. An example, the Legg Mason Martin Currie Equity Income Trust, has been a good performer, returning 11.88 per cent over the year to May 31, 10.16 per cent a year over three years and 14.10 per cent a year over five years. Minimum investment is $30,000.

Mortgage funds are another investment generating higher returns but it’s important to choose carefully. La Trobe Financial’s 12-month term account has won Money Magazine’s Best Mortgage Fund award eight years in a row. La Trobe made it through the global financial crisis and it’s been in business for more than 60 years. You can access this fund with a minimum of $1000 and all money is invested in cash or loans secured by first mortgages in Australia. It’s paying 5.2 per cent a year and distributions are monthly.

Investors are also embracing peer-to-peer (P2P) lending, even though it’s relatively new in Australia. RateSetter enables you to start with as little as $10 and lending terms of between one month and five years. Interest rates vary over time but are currently 3.7 per cent for one month, 4.8 per cent for one year and 9 per cent for five years.

Retirees … should consider having some funds in the share market.