How to get the best return on your cash

How galling to be perpetually on the wrong side of interest rate movements. When baby boomers were paying off their home loans, mortgage rates hit 17%. Now they're in retirement they have to squint to see the return on their deposits.

With the official cash rate at a 60-year low of 2.25% and more cuts likely, it doesn't help when fast-talking analysts tell the old folks to stop grumbling because the rate hasn't fallen to zero as it has elsewhere.

Self-managed super funds (SMSFs) keep about 30% of their portfolio in the safety of cash and fixed interest. How tempting it is then to switch to high-dividend-paying shares or other high-yielding investments.

"If you're looking to chase yield, you are actually switching from defensive to growth assets and that's a conscious decision you need to be making," warns Claire Mackay, principal at Quantum Financial.

"You can't say, 'I want to keep it defensive yet I want to chase yield when yields in defensive investments come down'. If you are prepared to take on additional risk, that's fine. But recognise the return isn't guaranteed nor is the growth guaranteed."

Mackay says cash and fixed interest are there to protect you when markets turn ugly. "They ensure cash is available to pay the bills and to fund your pension."

Traditional fixed income is made up of government and corporate bonds. In the GFC, term deposits were good payers and were a proxy for fixed income; technically they are cash investments, says Mackay.

For fixed interest, she prefers low-cost exchange traded funds (ETFs) - for example, Vanguard's Australian Government Bond Index Fund and Fixed Interest Index Fund, joint gold winners in Money's Best of the Best awards. "The benefit of an ETF - whether it's in bonds or anything else - is it's a listed investment and good for liquidity."

But don't go overboard, warns SMSF specialist Max Newnham. "Trustees who overallocate to fixed-interest types of investments, especially term deposits, cash and government bonds, face inflation risk because they have a static value and in this environment their income is falling.

But don't go overboard, warns SMSF specialist Max Newnham. "Trustees who overallocate to fixed-interest types of investments, especially term deposits, cash and government bonds, face inflation risk because they have a static value and in this environment their income is falling.

"If you've got someone in their 60s the inflation risk is still high, given life expectancy could be in the 80s. So if you are ultra-conservative you will be eating into capital quicker. That's why there's a need for balance with allocations to cash, fixed interest, shares and property." For property, he favours unlisted property trusts such as Australian Unity, Charter Hall, Cromwell and CorVal for their income of 6.5%-8%pa.

"I like to regard them as income-growth investments because you receive superior returns. There is some risk but fund managers that survived the GFC have proven their mettle." Another income investment he likes for its track record and many awards (including Money's Best Mortgage Fund) is La Trobe's Australian Mortgage Pooled Option, with returns above 6%pa.

Push for a better rate

Markets are of the view there will be another interest rate cut, according to Stephen Mickenbecker, head of research at Canstar. So what can investors do about it?

"Lethargy is dangerous," he says. For starters, he recommends you compare rates on Canstar's website. That way you can establish what to aim for.

For instance, the site showed the difference between the top and bottom rate for a three-year term deposit was 2.4% - 3.7% versus 1.3%. The other thing you can do is negotiate a better rate with the bank. There's no harm in being pushy; bankers are hardly shrinking violets.

"With term deposits you can negotiate pretty actively if you've got a sizeable amount of money," says Mickenbecker. "There's less likelihood of success with online savers.

"Obviously the bigger the dollar amount the better chance you have of getting a better rate. $100,000 would be the minimum starting point. If it's close to $1 million, it's conceivable you'll get 0.25% more."

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