"I used to have a term deposit for the Grandchildren, but the banks don't pay anything anymore. Where could I best invest around $ 10,000 for each of them?"
Heidi in Brisbane, QLD
Top answer provided by:
Thanks for the extremely relevant question Heidi! A lot of Australian savers are asking the same question! The current interest rates are at their lowest point ever and it is making life difficult for any saver who has traditionally left their money on deposit and used the interest to help fund their lifestyle or build up capital for beneficiaries.
This has driven some people to invest in other assets & investment areas however there are a lot of things to consider here and as I don’t know your financial position I will cover as many options as possible. The following is a sample list of things to consider:
Objective – what is the purpose of the gift; general expenditure or something specific like education?
Time frame – how long can you invest the money for before you gift it to the Grandchildren? What age would you like them to be when you gift it to them & will it be all at once or in stages?
Appetite for Risk – It is impossible to talk about returns without also talking about risk!
Are you prepared to invest in other asset classes like Equities, Fixed Interest and/or Property? This may result in fluctuations in the value of your asset and even a real or nominal loss. However, it may give you a higher return than cash at the moment over the medium to long term.
Rate of Return – have you got an ideal rate of return that you wish to achieve annually? Have you achieved this before?
Taxation – are you a taxpayer or retired?
Aged Pension/Centrelink Benefits – will any gift impact your financial position now or later and will you need to declare it to Centrelink?
Moving to potential assets to invest in you have the following choices, which is not an exhaustive list:
Equities – these are shares in companies and generally it is a good idea to purchase a portfolio ie a number of them so that you can diversify and hopefully reduce the risk! You can invest in large or small companies, in Australia or Internationally which can hopefully return some capital growth and income by way of dividends. Dividends can be reinvested which over time can add significant value to your portfolio. Generally over time equities can substantially outperform cash but it does add investment risk into your world and will require patience and potentially more ongoing decision making than cash. Equities can be accessed via a Listed Investment Company (LICs), a Managed fund, an Exchange Traded Fund (ETF), directly via a share buying platform or even via Super.
Property – Ok, its highly unlikely you will be able to buy a property with $10,000 however you can purchase a portion/share in one! This asset class adds to diversification and whilst also riskier than cash can return decent growth over the long term. Rental returns can also add to the growth of the investment. It can be quite volatile and in rare cases you may not be able to get your money back if the investment suffers large withdrawals and is unable to sell buildings to cover the redemptions. Property can be purchased via a LIC, a Managed fund, an ETF, a Real Estate Investment Trust or even via Super.
Fixed Interest – these can be more cautious assets than property or equities and are in fact a debt instrument so you are buying government or corporate debt. You can invest in Government & Treasury Bonds and/or Investment Grade or High Yield Corporate Bonds. Each bond has its own rate of return and risk rating so it is important you understand what you are buying. The price will fluctuate daily just like property & equities and the return is linked to inflation, interest rates and the ability of the borrower to repay. You can purchase Australian & International fixed interest assets via a LIC, a Managed fund, an ETF, or even via Super.
Cash – I have decided not to include cash as you are looking to achieve a higher return than a TD which are generally one of the highest return for this asset.
As the feature did not qualify the time frame required, I have included Super as a way of saving for your grandchildren, please note that under current legislation they will not be able to access the gift until they are age 60 so may not be much use if you want the grandchildren to enjoy it whilst they are young! As you can see Heidi there are multitude of other assets to consider and in finance there are usually many ways to achieves one’s goal. I would add as a conclusion that most Financial Planners will explain the importance of diversification when investing. This means it is best not to concentrate solely on one asset class but a mixture of assets that are closely aligned with your goals, objectives and appetite for risk and loss. That way you will hopefully achieve a higher return than that offered by cash and also be able to sleep at night, if the worst were to happen.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.