Banks only one of many fixed interest avenues

Photo / Glenn Jeffrey

We all know that banks offer a safe place to stash your cash. When you deposit money at the bank you're in effect lending the bank money for a fixed period of time.

In return, the bank pays you a "fixed interest" rate for the loan of your capital until you want it back again and withdraw it.

The big thing for investors is that savings accounts are relatively safe - especially as most bank accounts are government guaranteed.

But there are other forms of "fixed interest" investments.

They include credit union and building society investments, and debt securities, such as bonds or capital notes (more about them later).

Interest rates on savings accounts vary hugely and if you're serious about saving it's worth shopping around.

Standard current accounts pay as little as 0 per cent. If you change accounts or have more than one you can get as much as 3.75 per cent on savings, yet have instant access to it.

If you want a higher return than that, then there's a trade-off to be made between interest rate and the time you're prepared to lock your money up for. If you don't need your money for say nine months you can get 5.35 per cent interest from a mainstream bank - but you won't be able to withdraw your money.

If you add risk to the trade-off you can get an even greater return. Over nine months, for example, Asset Finance, a finance company, will pay 7.75 per cent. This company doesn't have a government guarantee and nor is it rated as safe as the banks by international credit scoring agencies, such as Standard & Poor's. So you're being paid a higher interest rate for taking a greater risk of losing all your money.

There are a number of other organisations that offer savings accounts, and term deposits, each with their own risk versus return. They include co-operatives, such as the PSIS; building societies, such as CBS Canterbury; credit unions, such as Manchester Unity; finance companies, such as UDC Finance; brokers, such as Forsyth Barr; and crown agencies, such as the Public Trust.

If you decide you prefer savings accounts, then it's worth considering cash and term deposit Pies.

These are accounts much the same as savings accounts and term deposits. You're just taxed more favourably on them, giving you a greater return.

An on-call cash Pie deposit of $10,000, pays the equivalent of 5.52 per cent this week if you're a 38 per cent taxpayer, and 5.10 per cent for a 33 per cent taxpayer.

If you were willing to lock $10,000 (most banks aren't offering $5000 Pie term deposits) up for nine months, the effective rates would up to as much as 5.74 per cent for a 38 per cent taxpayer and 5.31 per cent for a 33 per cent taxpayer.

An alternative to savings accounts and term deposits are "debt securities". These can be relatively safe as investments, but aren't widely understood by the public. How they work is that instead of lending money to a bank, as you do when you make deposits, you are lending your money to companies and agencies, such as Fonterra and Auckland International Airport, the New Zealand Government, and local councils.

Both companies and government agencies need to raise money for projects by selling "bonds" or "capital notes", which are types of debt securities. In return for your loan, you get a fixed return similar to interest, which is called a "coupon".

This interest rate can be quite a lot higher than that paid by banks for savings or term deposits. It does, however, cost to buy debt securities because you need to pay brokerage to a stockbroker when you buy and sell.

Where debt securities differ from savings accounts is that they can be bought or sold on the NZDX market and the value of the capital you have invested will rise and fall over time - albeit not usually by much. The NZX's website at www.nzx.com/markets/nzdx has some introductory information about debt securities and how to invest in them.

Because fixed interest investments are considered safer than shares or property investments, over the long term your money grows at a slower rate than it would invested in higher-return investments.

Having said that, everyone has a reason to keep some of their savings in easily accessible cash. That way they can cover living expenses should they lose their job, or their income from their investments.

The adage "keep it simple, stupid" applies to fixed interest investments. If you don't understand the product, don't buy it. It can be worth educating yourself about debt securities and Pies.

To check out the best interest rates visit: Interest.co.nz

Where to start

* If you want to buy debt securities such as Government bonds or capital notes you will need to use a stockbroker. Stockbroker details are on the NZX website at www.nzx.com/investing/find-a-broker

* Debt-securities prices are also on the NZDX website or in the Herald, but spend some time familiarising yourself with the data.

* It is also possible to buy units in fixed interest funds. These funds own a variety of different debt securities under one umbrella, which help you spread your risk. Details can be found on Fundsource.co.nz.

* Savings and term deposit rates can be compared on interest.co.nz and canstar.co.nz. The former shows the latest interest rates and the latter rates the products on their value for money and fine print.

It is usually possible to open an account over the phone. But check the bank or institution's website and make sure you're aware of the fees, charges and any conditions such as the number of withdrawals you can make each month.