KEY POINTS:
Most of us think of "cash" as being the folding stuff we keep in our wallets. Cash investments, however, can range from simple savings accounts to highly leveraged cash funds.
Cash investments are liquid - or short term - and relatively safe investments. Many, such as simple bank
deposits, offer a guarantee that your principal will be returned.
Depending on your definition (and they vary) "cash" includes term deposits, cash management accounts and short-term, fixed-income securities (similar to debt securities but much shorter in duration). Closely related are fixed-interest investments for a specified term, says Philip Macalister, publisher of the website depositrates.co.nz.
Over the long term, the return from cash investments doesn't keep pace with other investment classes. Of late, however, cash has been a good place to be, says Jeff Matthews, senior financial adviser at Spicers Wealth Management.
"[The high rates are] likely to continue for the next 12 months because it is unlikely the Reserve Bank is going to reduce interest rates until next year," he says.
In the past, says Anthony Edmonds, head of sales and marketing at AMP Capital Investors, the tax treatment of cash funds meant that many investors were better off holding cash investments in their own name, rather than through a fund such as the AMP Capital NZ Cash Fund. That has changed, he says, thanks to the introduction of PIEs (Portfolio Investment Entities) on October 1 of this year. The underlying funds remain much the same as in the past, but the new system means they are no longer at a tax disadvantage to other investments.
The funds management industry believes the PIEs regime will boost its fortunes, thanks to a reduction in the tax an individual investor will pay on returns, making these managed investments more attractive. Instead of the old blanket taxation rate of 33 per cent before distribution, funds that become PIEs are now taxed at an investor's marginal tax rate, up to a cap of 33 per cent. If the investor's marginal rate is 19.5 per cent, that's a considerable tax saving.
Come April 1 next year, the top rate will be reduced to 30 per cent.
There is another advantage in having money in cash funds that qualify as PIEs, says Edmonds. Under the new tax regime, individuals who structure their investments carefully could find themselves paying only 19.5 per cent tax on the whole of their income up to $60,000 a year, or double that for a couple.
But for some investors, all the talk about tax may be smoke and mirrors. Looking at returns shown on the Fundsource.co.nz website for retail cash funds, it looks likely that the return on investment in a cash fund, with its highly skilled manager, is unlikely to exceed the return from a simple bank online saver account.
When I did a search on Fundsource's website for one-year returns on retail cash funds, I found that the majority returned less than an account with RaboPlus and the worst - 5.90 per cent from the Sovereign Spectrum Plus NZ Cash Trust - came nowhere close to what the bank paid.
Currently, wholesale funds such as AMP's cash fund tend to have higher returns than retail funds - the ones offered to individual investors - because they escape many of the marketing costs and other expenses. But even that fund fails to beat the 8.2 per cent being offered on call by RaboPlus this week.
The downside of PIEs is their fees, which haven't changed one iota under the new regime. Having said that, Mike Heath, general manager of RaboPlus, says he expects to see financial providers offering PIE cash funds in the future with low or no fees.
The banks, says Macalister, are likely to offer cash PIEs to investors looking for tax-effective solutions. However, investors need to be aware that money in these vehicles will change in nature, from being a registered bank deposit, covered by the bank's capital and subject to Reserve Bank scrutiny, to a pooled investment not guaranteed by the bank.
One of the reasons banks can offer such attractive rates, says Binu Paul, general manager of Fundsource, is that their model is simpler - taking money on deposit and lending it out for mortgages at a 2 per cent or greater premium. Fund managers need to take a management fee and, if the return on their fund doesn't beat what banks are offering, then the return after the fees and expenses are taken out looks a bit sick.
Come April 1 next year that could change for investors who can take advantage of the fact that they'll pay less tax on PIE cash investments than straight savings accounts.
Private investors can get access to wholesale funds via wrap accounts, offered by investment managers, where investors' money goes into a basket of funds, which often includes a cash fund.
Investors often use cash accounts within a wrap platform to park money from a house or business sale until they are ready to invest it, says Matthews. But they're not for long-term investment.
Many investors are confused about the cash investments they are offered through fund managers. There are, says Robert Oddy, director of International Financial Planners, a wide range of cash funds and some are riskier than others.
"Some of these funds are highly leveraged investments that invest in the credit markets in the United States", says Oddy.
"That means that people investing in them can lose their money. It is not like a bank and the fees can be high."
* Diana Clement is an Auckland-based personal finance and investment writer
Kinds of cash
* On-call bank deposits.
* Term deposits.
* Short-term fixed-income securities.
* Managed cash funds.
