Term deposit alternatives
There are many types of investments that could be considered term deposit alternatives by way of their features, however all involve taking on a degree of higher risk.
Term deposits are a form of debt investment (i.e. you loan your principal amount to a bank in exchange for repayment of the principal with interest), which means an analysis of other debt investments can be helpful when comparing term deposit alternatives.
Other types of debt investments include:
- Government bonds
- Promissory notes
- Bills of exchange
- Convertible notes
- Managed funds
The similarity with term deposits and most of these debt investments is that they involve a lender advancing an amount of principal to a borrower in exchange for a rate of interest and repayment at a pre-agreed time. This is no different to a term deposit, which is a loan to a bank.
Differing risk profiles
Where these investments can be considered different to term deposits is their risk profile. They each have varying degrees of risk, and that risk is largely dependent upon the strength of the underlying assets.
Debt investments where the borrower has multiple ways to repay principal and interest are generally considered lower risk than those that might be single sector or single asset focused. For example, lending money against an apartment block might be considered higher risk if the repayment of principal and interest obligations is dependent on that one apartment block.
By comparison, debt instruments that have a diversified underlying portfolio comprising multiple different assets in different sectors, locations and even currencies, can represent a lower risk profile because the borrower has multiple ways of facilitating repayment of principal and interest.
Who term deposit alternatives are suited to
In recent years there has been an increase in investors moving away from banks to non-bank providers offering similar debt-style investments. They often move because they can achieve a higher yield and are comfortable taking on more risk. The higher yield is effectively recognition that there is a different risk profile to depositing money with a bank.
An increasing number of retirees, managers of self-managed superannuation funds and savvy investors have realised that in order to generate meaningful yield on their capital they must look for businesses that value access to additional capital and are prepared to pay a premium for it.
If you would like to know more about the different types of alternatives to term deposits we suggest downloading a copy of our eBook which explores these in more detail.