Many fixed-interest options to choose from

BY MARY HOLM

Q: I have inherited about $150,000. I want to put it into a house, but because of my work situation, I'm not sure where I will be living.

I want to park the money somewhere for about a year, until all of that becomes clear.

It seems, from reading your column, that a year is far too short a time to put the money into shares or property, so I suppose I should go with fixed interest.

Term deposits, government bonds, corporate bonds, a bond fund - which would be most suitable for that amount for a year?

I'm willing to take a little risk if it brings a higher return, but not too much risk.

A: You're quite right that a fixed-interest investment would be best. But which one?

It turns out that there are even more options than you listed. Cam Watson, of sharebrokers ABN Amro Craigs, has come up with the following list:

* Bank term deposits: No fees, but if you want to get the money out early there is likely to be a penalty.

* Corporate bonds: You can sell these at any time.

That liquidity, though, carries risk. If interest rates rise after you buy, and you then sell the bond before its maturity date, it will be worth less than you paid for it.

But you can hold a bond to maturity, at which point you will get back what you paid.

Two bonds with high credit ratings that mature about the right time are ANZ, maturing next May 15; and BNZ, maturing September 15 next year.

You will have to pay brokerage on these - about 0.25 per cent for $150,000 worth - but the yields will probably be higher than on term deposits.

* Corporate notes: Watson says you may want to put, perhaps, $25,000 into a somewhat riskier corporate note.

You will receive a higher return but in the unlikely event that the company goes belly up within the next year, you could lose your money.

He suggests Fletcher Building capital notes, which have an election date of June 15, 2003. On that date, you get your money back, possibly in the form of shares you can sell immediately, but probably in cash.

Another option is Fonterra perpetual capital notes. These have no maturity date.

The interest rate is reset every July 10 at 1.7 per cent above the Government stock rate.

This means that, if you sold about July 10 next year, the risk of a capital loss is reduced.

* Bond funds: Because you pay an entry fee and perhaps an exit fee, these tend to be better for longer terms than one year.

There is also the risk of a capital loss if interest rates rise, causing unit prices to fall.

* Cash management funds: You can get a one-year term deposit in these. Interest rates tend to be higher than on bank term deposits, but not always.

* Debentures: These are like term deposits but issued by finance companies. Because they are riskier, returns can be higher.

It's safer to stick with a large issuer, such as UDS or South Canterbury Finance.

* Mortgage funds: Not to be confused with contributory mortgages, which are risky, as recent news stories show.

Mortgage funds hold a large number of ordinary (as opposed to high-risk) mortgages and usually have insurance against foreclosures, so they are relatively low-risk.

Generally, though, they are designed for longer-term investors and, like a bond fund, usually charge an entry fee.

* Government stock and Kiwi Bonds: There is Government stock maturing next April 15, which might suit you.

These are the lowest-risk investments around, but because of that, the returns will be lower.

So there we have it. I hope you're feeling enlightened rather than confused. At least you can now go to a sharebroker or financial adviser with a better idea of what they might discuss with you.

For returns and other information on many of these products, see www.interest.co.nz. * Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net. I read your column in the Saturday paper. One of the articles (on property?) said something along the lines of "on the basis of advice presented in your column I bought X and sold Y ... )"

I was surprised you printed this without some sort of caveat that advice presented is of a general nature and does not specifically guarantee future returns etc etc.

Your letter certainly got me thinking.

I've always assumed that nobody would make a major financial move based solely on what they read in a newspaper article.

I don't know enough detail about anyone who writes to me - let alone other readers - to be 100 per cent sure they should do what I suggest.

The idea is to steer people in the right direction. Then they can gather more information before taking action.

Nevertheless, could I be dragged into court, charged with steering someone in the wrong direction?

Tim MacAvoy of KPMG Legal, who specialises in financial services law, thinks this is unlikely.

"It would, however, be sensible to confirm to readers that your advice is of a general nature, and that you are not responsible for any loss which any reader may suffer from following your advice", says MacAvoy.

Done.

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