FALLING interest rates may be great news for anybody paying off a mortgage, but they present challenges for investors who are now receiving lower returns on their precious savings.
This is why it is time to think about the role of cash as an investment and consider strategies to boost returns.
It is critical that you understand the risk/reward trade off of shares and interest bearing securities. If you invest in a quality diversified portfolio of shares there is huge upside potential with little chance of loss if you can hold for the long haul. However, if you opt for fixed interest, your earnings are limited to the rate paid by the security, but if the investment goes bad you can lose the entire capital sum. This is why interest bearing deposits can be a much riskier investment than shares if you don't stick to the big names.
For those who want enhanced returns it's hard to go past some of the diversified income funds that are now being offered by leading fund managers. They invest in a range of assets that include interest bearing securities, high yielding shares and listed property trusts, and can produce highly effective returns because of the franked dividends that come from the shares and the tax concessions that arise from the building allowance and depreciation on the properties.
They do not offer the stability of cash because of the presence of listed investments in the mix, but they do have the potential to give you much better returns after tax than leaving your money in the bank.
Please seek professional advice before you invest. There is a huge gap between the best and the worst products and quality research is essential. Good advisers will have this on tap.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: email@example.com.
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