Hi, my wife and I have recently sold our apartment in Melbourne and are going to be renting for the next 12 months to give us some time to make our next move. At the end of the sale we will have approximately $740,000 in cash and are currently struggling to find the best short term investment so we don't just have the money sitting in a bank for the next 12 months. Any advice is welcome?
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The proceeds of your property sale should not be put at risk whilst you are deliberating your next move in the next 12 months or so. The certainty in maintaining your capital should outweigh the potential to obtain higher rates of return with market linked investment. This means that “cash” investments are generally the way to go, however there are a range of options and returns within this asset class. The range of product options include (but are not limited to) everyday savings account, internet savings account, bonus interest savings accounts, and term deposit.
Each of these cash investment options offer a range of different ways to access your savings, with typically the greater the restriction to access the higher the interest rate (but this is not always the case – check the product details). For example, an everyday savings account generally offers a very low interest rate but the trade-off will be your ability to access your investment at-call. On the other hand, a term deposit with a 12-month term will generally offer a higher interest rate, but there will be restrictions to access to your money. You may not always be able to access your Term Deposit capital prior to maturity as this is at the institutions discretion and also may incur an interest rate penalty.
You should also take into account the Federal Government Guarantee Scheme. This scheme which took effect from 1 February 2012 covers deposit products provided by Authorised Deposit-taking Institutions (ADIs) such as banks, buildings societies and credit unions supervised by Australian Prudential Regulation Authority (APRA) up to $250,000 per person per institution on deposits guaranteed under the Financial Claims Scheme.
There have also been changes to some term deposit products in terms of ability to gain early access to funds prior to maturity. Due to increased capital adequacy requirements (known as Basel III reforms), APRA required ADI’s to hold sufficient funds as a buffer against the risks that they undertake. This has resulted in changes to some term deposits now requiring 31 days’ notice for early withdrawal which is at discretion of the ADI. There are variations in term deposit products (with some having to ability to redeem prior to maturity without penalty), so it is worth taking the time to know the product and review the term and conditions prior to commencement.
In summary, Matt you should consider your need for access to funds (liquidity), the interest rate being offered, level of investment security and the product terms and conditions. For example, you may want to have a range of cash/deposit products to cover your requirements such as multiple term deposits and high interest cash accounts. This would enable you to manage your requirement for access to funds in possibly 12 months’ time; obtaining a competitive interest rate as compensation for reduced liquidity/access to your funds whilst also of being mindful of holding no more than $250,000 per financial institution if you wish to have financial products covered by the Federal Government Guarantee Scheme.
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