New investment fund offering set return rivals bank deposit rates

Nikko Asset Management has introduced a new income-based investment fund appealing to savers looking for a slightly higher rate than bank term deposits.
Nikko Asset Management has introduced a new income-based investment fund appealing to savers looking for a slightly higher rate than bank term deposits. Photo credit: Getty.

A new fund that invests largely in bonds and cash is offering Kiwi investors a set rate of return above that of bank deposits.

It comes as COVID-19 has caused interest rates to plummet to all-time lows and closure of the Bonus Bonds Scheme is forcing 1.2 million bondholders to consider other options.

Bank term deposit rates currently sit at around 1.50 percent. For investors looking to earn slightly more, investment management company Nikko AM has introduced a new fund offering a set rate of return. For 2020, the return is 3 percent.

Managing director George Carter said the company sets a return at the start of each year, based on the expected performance of the fund. Investors in the fund receive a distribution payment at the end of each quarter.  They'll earn the full amount of the declared rate over 12 months.

"When [investors] go into the fund, they'll know what payments they're going to get each March, June, September and December for that particular year," Carter explained.

Similar to a term deposit, the interest rate for the fund is set upfront. But would-be investors also run a higher risk that their capital (money invested) might be less than they put in.

When it comes time to cash out of the fund, investors get back an amount that reflects the fund's current unit price. For example, if on January 1, the unit price is $1, the rate of return is 3 percent and the fund subsequently returns 2 percent after fees, the unit price would be $0.99 at the end of the year. 

"The expectation is that return will be a little higher than the rate we've declared at the start of the year. The difference (more or less), comes through at the unit price.

"Effectively, the capital that investors put in the fund can go up and down over the year," Carter explained. 

Nikko AM managing director George Carter said the new income investment fund offers a set rate of return, declared at the start of each year.
Nikko AM managing director George Carter said the new income investment fund offers a set rate of return, declared at the start of each year. Photo credit: Supplied.

He said a common question is how much to save for retirement. Investors are urged to get personal advice for their circumstances, but as a rule-of-thumb, 15 percent of pay isn't too far out. 

"For a 35-year-old earning $60,000 per year, assuming they'll get NZ Super and want an average lifestyle, the Nikko AM GoalsGetter website suggests that saving 15 percent each payday would achieve that," Carter added.

Financial adviser and author Martin Hawes, said when markets go up and down, such as during COVID-19, having a "diversified portfolio" (a mix of investment types), is a smart way to go.

"In times of uncertainty, a little bit of everything," Hawes said.

That would mean spreading investments across a range of assets, such as cash, fixed interest, property and shares. 

Investing in a managed fund, such as KiwiSaver is one option. But as KiwiSaver withdrawals can only be made for specific circumstances, investing in a separate equivalent fund also allows flexibility.

"Spend a bit of time to decide whose got the best fund in the category most suited to you in terms of risk," Hawes suggested.

Savers wanting to compare options could use online tools such as Sorted smart investor, to compare funds across different levels of risk.