Many of our customers want to know how Midlands is different to bank term deposits and managed funds, like KiwiSaver.
Term Deposits:
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 initial deposit 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 that you will be paid.
Bank terms deposits are a very low-risk investment choice. However, they typically offer lower returns than other common types of investments.
KiwiSaver & managed funds:
Many New Zealanders invest in other managd funds, including KiwiSaver.
Returns from KiwiSaver funds and other managed funds with a mix of shares, bonds, and other investments. Returns are variable, not ‘fixed’. Funds with a high proportion of investments in shares, in particular, may offer higher potential returns over time but typically have higher volatility over the short term; that is, there typically may be 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.
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 expected volatility.
We’ve reviewed most KiwiSaver funds in New Zealand and whilte there is some variance we found the following minimum investment timeframes*:
– Conservative KiwiSaver Funds are mostly 3 years;
– Balanced KiwiSaver Funds Risk Ratings are mostly 5 years; and
– Growth KiwiSaver Funds Risk Ratings are mostly 7 years.
The Midlands Smarter PIE Fund has no minimum suggested period of investment because the expected level of volatility of the fund is very low.
Another important thing to note with KiwiSaver funds is that you do not usually receive any regular income or returns. Even dividends are reinvested back into the fund. You are not normally able to access your KiwiSaver investment and any returns unless you are purchasing your first home or you reach 65 years of age.
Understanding Risk Rating
Risk Ratings are a handy tool which allows investors to easily compare the risk profile of different managed funds on a like for like basis. That’s because all retail managed funds in New Zealand (including KiwiSaver funds) must produce a Risk Rating and all Funds use the same formula, which is setby the Government.
The Risk Rating formula produces a number ranging from 1 (indicating lower risk) to 7 (indicating higher risk). Midlands Smarter PIE Fund has a Risk Rating of 1 out of 7 (the lowest risk rating possible, since there is no such thing as a risk free investment).
We’ve reviewed the Risk Rating of most Kiwisaver Funds in New Zealand and found the following*:
– Conservative Kiwisaver fund Risk Ratings are usually a 3 out of 7;
– Balanced Kiwisaver fund Risk Ratings are usually a 4 out of 7; and
– Growth KiwiSaver fund Risk Ratings are usually a 5 out of 7.
This shows that KiwiSaver share funds generally come with higher Risk Ratings than the Midlands Smarter PIE Fund. However, consistent with the risk versus return interrelation above, this usually comes with higher potential returns over the long term. In other words, if you invest in a KiwiSaver (or other) fund with a higher Risk Rating, you are likely to end up with a higher balance – but you can expect ups and downs along the way. An investment with a lower Risk Rating like the Midlands Smarter PIE Fund is more likely to provide consistent returns, in fact, that’s one of the things we are known for.
As an investor, it is important to understand your appetite for volatility and risk and Risk Ratings and minimum investment timeframes are a good tool to allow you to do this. If you are unsure, you should speak to a financial adviser.
*Note the risk rating and minimum investment timeframes for any particular Fund can be found in the funds Product Disclosure Statement.
KiwiSaver after 65
As noted above, you are not normally able to access your KiwiSaver investment unless you are purchasing your first home or you reach 65 years of age. Once you reach 65, you have lots of flexibility and options, including withdrawing some or all of your contributions, your employer’s contributions, the Government’s contributions and your returns.
When you turn 65, your employer no longer needs to contribute to your KiwiSaver
However, what if you are still working? Lots of New Zealanders now choose to continue to work after turning 65. If you are over 65 AND still working, you can still keep your KiwiSaver account open and keep contributing to it. However, it’s important to know your employer no longer needs to make the 3% contribution your KiwiSaver account. Some employers chose to continue to pay in the 3% contribution, but they don’t have to. Furthermore, the Government will no longer contribute the annual Government contribution of up to $521.43 per year. This removes two of KiwiSavers’ big advantages. As such, once you reach 65, it’s worth considering these changes as well as your appetite for volatility and risk and getting some professional advice as to whether KiwiSaver is still the right investment choice.
Midlands offers a conservative, low risk investment with consistent returns. Our Risk Rating is a 1 out of 7 and our historic returns surpass bank term deposits and average returns from Conservative KiwiSaver funds.