Professional Investment Services

Today I was asked a great question on one of the forums I write on.

It is a question that was asked via a private message so names have been removed to protect the innocent

Dear Terry

I am 21 and I’m just looking into saving up for my first house deposit.

I’m thinking about either managed funds or term deposits. I’ve been looking through the returns for balanced funds and share funds and the returns don’t look any better than 5 year term deposit rates right now. Why would I go into a fund instead?

Thanks

Bob.

This is a great question and one that probably faces many people looking at saving for their first home. Congratulations by the way on aiming to get your first home at an early age.

Here is my reply.

Hi Bob

The answer to that depends on a variety of parameters however probably the two most important would be the time frame and your risk profile.

Obviously there will be other factors such as how much you intend to contribute initially and over time.

Are you able to make regular payments or will the contributions be erratic, i.e 100 per week vs $1000 when ever you can scrape it together.

How ever back to the most important factors, time frame and risk profile.

Depending on your time frame Managed funds may not even be an option. This type of investment needs to be a medium to long term investment so at least 3 years preferably at least 5 years or more.

That may be enough to make the decision for you.

Secondly, risk profile, depending on your risk profile or the amount of risk you are willing to take (every investment, even term deposits have some form of risk) will determine what type of investment is appropriate for you.

If you are very risk adverse then term deposit will probably work better for you although many funds are available that has the same risk characteristics as term deposits.

If your risk profile is such that investment into asset classes that provide both income and capital gain are appropriate then you are able to increase the potential return.

You will notice I say potential return, this is one of the things that comes with increased risk, a potential increased return, the flip side however is a potential decreased return.

The funds you have looked at will be a certain selection of funds which sound like they have not performed that greatly as I know of many that have outperformed term deposit rates by many times over, however they are all classified as High risk funds, in other words they invest into asset classes like, shares, property, international shares and international property and they will often use internal leverage to increase the overall return to the investors.

So the answer lies in your hands. How much time do you have and what level of risk are you willing to take.

I’m happy to talk further in more detail if you like.

cheers

Terry