Midlands vs Term Deposits & Kiwisaver

Many of our customers want to know how Midlands is different to bank term deposits and other managed funds, like KiwiSaver.

When it comes to growing and managing your money, there’s no one-sizefits-all solution. Different investment types offer different features, levels of access, and risk-return profiles. Below is some information to help you understand the main differences between the Midlands Smarter PIE Fund and these products. If you would like additional information, or someone to help guide your decision, you should speak to a financial adviser.

An investment in the Midlands Smarter PIE Fund is not a bank deposit, and there are some significant differences between Midlands and banks that investors need to understand.

A bank term deposit is a type of savings account where you put your money away for a fixed period of time, known as the “term.” During this time, you typically can’t withdraw the money without facing penalties or restrictions. In return, the bank will pay you back your investment plus a fixed interest rate throughout and/or at the end of the “term.” Generally, the longer you lock your money away, the higher the interest rate that you will be paid.

Bank terms deposits are a very simple, low-risk investment choice. Depositors enjoy the benefit of knowing exactly what their return will be (due to the fixed interest rate), and term deposits are also now eligible for the recently launched Depositor Compensation Scheme. The DCS covers deposits of up to $100,000 per eligible person, per institution, should a financial institution covered by the DCS fail.

However, the low risk associated with bank term deposits means they typically offer lower returns than other common types of investments and may struggle to keep up with inflation in a low-rate or highly inflationary environment.

The Midlands Smarter PIE Fund’s investment objective is to provide investors with an income return pre-tax (but after fees and expenses) at a level which exceeds the average three month term deposit rate advertised by all relevant New Zealand registered banks. The Fund’s historic performance shows how our returns have compared to bank term deposits over time – although you need to remember that past performance is not a reliable indicator of future performance.

Returns from the Midlands Smarter PIE Fund are more volatile than the returns from bank term deposits (meaning they will change more over time) and investors are also indirectly exposed to other risks associated with the mortgage-backed investments made by the Fund. We explain these risks in more detail in the Product Disclosure Statement.

You also need to remember that investments in the Midlands Smarter PIE Fund do not benefit from coverage under the DCS.

Many New Zealanders invest in ‘managed funds’, including KiwiSaver, New Zealand’s long-term retirement savings scheme. The Midlands Smarter PIE Fund is a managed fund, but not all managed funds are the same.

KiwiSaver funds and other managed funds generally invest in a mix of growth assets (like shares) and income assets (like bonds and cash) in varying proportions. There are a vast choice of funds available, ranking from conservative to aggressive.

Returns from managed funds are variable, not fixed, and change depending on how the fund’s underlying investments perform. There are also differences in how managed funds manage these returns. Some managed funds, including the Midlands Smarter PIE Fund, give investors the option to be paid regular returns. Others keep investment returns within the fund. This helps the value of an investment grow over time, but may not suit someone who needs regular income from their investment.

KiwiSaver funds and other managed funds with a higher proportion of investments in growth assets like shares generally offer strong long-term growth potential, but typically have higher volatility over the short term; that is, there are typically more ups and downs along the way and returns can be negative as well as positive. This volatility can be unsettling for some investors, especially during periods of economic uncertainty. In addition, this volatility may not be suitable for investors who do not want to hold a long-term investment.

By comparison, KiwiSaver funds and other managed funds with a higher proportion of investments in income assets like bonds and cash will normally have less long-term growth potential, but offer more stable returns.

Midlands Smarter PIE Fund should be amongst the most stable. It also means that over the longer term returns are likely to be lower than from other options – which is the trade off you need to understand.

One useful tool to help compare and gauge the potential volatility of a managed fund, including KiwiSaver, is to review the suggested ‘minimum investment timeframe’ which is a mandatory metric that retail managed funds must include in their Product Disclosure Statement. A higher ‘minimum investment timeframe’ can correlate to higher potential long-term returns but higher expected volatility.

There are other considerations to think about when comparing the Midlands Smarter PIE Fund to a KiwiSaver scheme. Investments in a KiwiSaver scheme are locked in until retirement or specific life events – the main one being buying your first home. As such, KiwiSaver is suitable for retirement planning (especially if you will also benefit from employer contributions to your KiwiSaver scheme) but not suitable for short-term goals or emergency savings. If you would like to understand more about KiwiSaver, we suggest visiting sorted.org.nz.