Was it a good move to change my KiwiSaver to a conservative fund? What’s your view on term deposit alternatives like Squirrel and Kernel? Should I change from Sharesies to Hatch or Tiger? These were some of the questions we answered in our 11th Ask Money King NZ Q&A held with our Instagram followers.
The answers in this article have been provided without any knowledge or consideration of the personal circumstances of the person who asked the question. This content should not be taken as financial advice.
In case you missed it – Our previous Q&A article:
– Ask Money King NZ (Winter 2024) β Is the market going bullish in the next year?
1. I changed my KiwiSaver to conservative just before a crash to buy a house soon. Was this a good move?
It’s generally a good thing to change your KiwiSaver fund in response to getting closer to or a change in your financial goals. For example, if you have $100k in a Growth or Aggressive fund and are now a few years away from buying a house, it’s probably a good idea to switch to a more conservative fund. That’s because shares are volatile and a downturn could easily wipe out a decent chunk of your deposit (e.g. to $90k or $80k). And also because your house purchase is so close, you might not have the time to wait for the sharemarkets and your fund to recover back to $100k.
So switching to a more conservative fund would help protect the value of your house deposit from being shaved away from market crashes and downturns. However, conservative funds are still at risk of going down in value because they have bonds and still invest in a small amount of shares. So if you’re very close to buying a house (e.g. in 1-2 years), then something like a cash fund might be more appropriate.
In regards to changing your KiwiSaver “just before a crash” – that’s generally not a good reason to change. How do you know in advance that a crash is coming? What if you switch and the market keeps going up? It’s impossible to reliably time the market, so we’d let your financial goals drive what fund you should be in, rather than feelings about whether the market is going to go up or down.
2. What’s your view on different term deposit alternatives from Aera to Squirrel to Kernel?
Just so we’re comparing apples with apples, it’s worth clarifying that Aera, Kernel, and Squirrel do not offer term deposits. However, they do offer a variety of savings products that are valid alternatives to term deposits. Let’s look at each providers offerings:
Squirrel
Squirrel offers a high interest on call savings account (currently with an interest rate of 5%), which you can deposit and withdraw money from anytime (unlike term deposits where your money is locked in for a specific period). Any money you deposit into them isn’t held by Squirrel themselves, but rather by a NZ registered bank (think about the likes of ANZ, BNZ, ASB).
So we like this product as it provides the safety of depositing your money with a major bank, but with a higher interest rate than the banks themselves. However, this is more comparable to a savings account rather than a term deposit – While it is more flexible than a term deposit, the interest rate tends to be slightly lower than a term deposit and is subject to change.
Further Reading:
– Bonus Saver vs Notice Saver vs Term Deposit β Which savings product is right for you?
Squirrel also offers “term investments” but these are not term deposits. Instead this involved lending out money as home loans, construction loans, and personal loans, so is higher risk and a different asset class to the products above.
Further Reading:
– Peer to Peer Lending review β Squirrel
Kernel
Kernel also offers an on call savings product under the “Smart Saver” brand. It’s almost identical to Squirrel’s offering as you can deposit and withdraw money from anytime, and money you deposit into them isn’t held by Kernel themselves but by a NZ registered bank.
Kernel also offers a cash fund which you can deposit and withdraw from anytime like their other funds. It has a slightly higher return than the normal on call account, and is also a PIE (for tax efficiency), but is also slightly higher risk due to its investment into cash equivalents like bonds. It’s also slightly slower to move money in and out of compared to the above savings products.
Aera
Aera offers a suite of savings products designed for first home buyers to build up their deposits. These are:
- Ninety – Targets a return of 7.15%. Invests 90% into IFTHC (a bond issued by Infratil), with the remainder being cash held in a bank. Requires a 90 day notice period to withdraw your money.
- Three – Targets a return of 6%. Invests 50% into the Kernel Cash Fund and 50% into the Nikko AM NZ Cash Fund. Requires a 3 day notice period to withdraw your money.
- Overnight – Targets a return of 5.75%. Invests 45% into the Kernel Cash Fund and 45% into the Nikko AM NZ Cash Fund, with the remainder being cash held in a bank. Money can be withdrawn overnight.
We’re not huge fans of Aera’s products. While Ninety offers much higher potential returns than a term deposit, it invest almost entirely in a single bond issue – This obviously makes the product poorly diversified and much risker than investing in a term deposit. With their Three and Overnight products, it’s easy enough to invest in Kernel’s and Nikko’s cash funds yourself to get the same returns.
3. What are the top 3 NZ managed funds with PIE tax rates?
This probably isn’t the answer you’re looking for, but it’s an incredibly difficult question to address because the “top” funds are going to vary from one person to another.
For example, many people will swear by a S&P 500 index fund as being the best (take the Foundation Series US 500 Fund or Kernel S&P 500 Fund as NZ domiciled PIE examples). But there are many issues with calling a S&P 500 fund a top fund:
- While the S&P 500 might be a good fund for someone investing long-term with a high risk tolerance, it’s not a good fund for short-term investors like someone wanting to save for a house deposit in 2 years.
- The S&P 500 only invests in US shares and isn’t diversified into companies based in other countries. This makes S&P 500 index funds unsuitable for us based on our personal preference for global index funds which are better diversified.
- Different people will also have different preferences when it comes to investing. Some might prefer to invests in other funds other than the S&P 500 which align better with their ethical views. Others may prefer an actively managed fund.
So there is no such thing as a “top” fund because “top” means different things to different people.
But the most important things to consider when choosing a fund is to:
- Pick a type of fund that best aligns with your goals and risk tolerance e.g. high growth/growth funds for long-term & high risk tolerance, and conservative/cash funds for short-term & low risk tolerance (you can use this Sorted link to help with this).
- Once you’ve figured out the type of fund you need, you can then pick a fund manager that offers that type of fund and best meets your preferences around fees, ethical investing, active/passive management and so on.
4. Would leaving cash in a cash fund or term deposit be better for the short-term?
Both are suitable for the short-term. They involve putting your money in safe assets where it won’t get exposed to the volatility of the share or bond market, while allowing you to earn some interest on that money. However, there are major differences around how they work and how flexible and risky they are.
With term deposits your money is deposited with a single bank, locked in for a fixed period of time, and earns a fixed rate of interest. This can be a good thing as you know exactly what returns you’ll get during that period of time. However, term deposits aren’t flexible. You can’t make any deposits or withdrawals (i.e. you can’t put more money in or take money out of your deposit) during the time your term deposit is active.
With cash funds your money is invested across a bunch of different cash assets like bank deposits and short-term bonds. You have the flexibility of being able to withdraw from it or make deposits at anytime. Some cash funds also have higher yields than term deposits, but this tends to come with slightly higher risk as they can contain riskier assets. While this is offset by the fact that cash funds invest in a diversified range of cash assets (instead of being invested in a single bank), keep in mind the returns cash funds provide are variable – You don’t get a fixed interest rate like term deposits, because their returns can go up and down depending on market conditions.
So as with everything else in investing, there is no definitive best between the two. It depends on what you personally need – a way to lock your money up for a fixed amount of time to earn a fixed amount of interest? Or a more flexible account you can pull money in and out of at any time?
5. Should I change platforms from Sharesies to Hatch or Tiger when I can invest more?
The answer depends on why you want to change platforms. We wouldn’t change unless you had a compelling reason to change, as changing could cost you money (e.g. transaction fees, money you could lose by tinkering with your portfolio etc.). So if you want to change for one of the following reasons then you probably just stick to Sharesies:
- You want to change for the sake of changing.
- A friend or someone on the internet suggested Hatch/Tiger to you.
- Purely because you’re investing more money. This alone isn’t enough reason to switch brokers because there is nothing wrong or nothing stopping you from investing more money into Sharesies.
However, if you want to change because of potentially lower fees, then you will need to do some maths to figure out what’s cheapest for the amount you’re investing. For example, if you plan to invest $100 NZD per week the fees would be roughly:
- Sharesies (without plan): 0.5% FX fee ($0.50) + 1.9% ($1.90) transaction fee = ~$2.40 NZD
- Sharesies (with $3 monthly plan): 0.5% FX fee ($0.50) + $3/4.3 ($0.70) transaction fee = ~$1.20 NZD
- Hatch: 0.5% FX fee ($0.50) + $3 USD ($4.85 NZD) transaction fee = ~$5.35 NZD
- Tiger (fractional shares): 0.35% FX fee ($0.35) + 1% ($1) transaction fee = ~$1.35 NZD
- Tiger (whole shares): 0.35% FX fee ($0.35) + $2 USD ($3.23 NZD) transaction fee = ~$3.67 NZD
So Sharesies is cheapest for investing $100 per week, but only if you subscribe to their $3 per month plan (which pays for $500 worth of buy/sell orders plus $1,000 of auto invest orders each month).
Say you plan to double your investment to $200 NZD per week. In this case the fees would roughly be:
- Sharesies (without plan): 0.5% FX fee ($1) + 1.9% ($3.80) transaction fee = ~$4.80 NZD
- Sharesies (with $3 monthly plan): 0.5% FX fee ($1) + $3/4.3 ($0.70) transaction fee = ~$1.70 NZD
- Hatch: 0.5% FX fee ($1) + $3 USD ($4.85 NZD) transaction fee = ~$5.85 NZD
- Tiger (fractional shares): 0.35% FX fee ($0.70) + 1% ($2) transaction fee = ~$2.70 NZD
- Tiger (whole shares): 0.35% FX fee ($0.70) + $2 USD ($3.23 NZD) transaction fee = ~$3.93 NZD
In this case even though you’re investing more, Sharesies is still the cheapest option. So Hatch or Tiger isn’t necessarily going to be better just because you’re investing more.
If you want to change platforms to access a certain feature that Hatch/Tiger has and Sharesies doesn’t, then that’s another reason to switch. Just keep in mind that right now neither Tiger or Hatch offer access to several features that Sharesies has such as NZ shares, KiwiSaver, and a savings account.
6. I’m getting $150k in a break up. Should I put it in index funds or a term deposit to save for a new house?
Sorry we can’t give you a definitive answer because it depends. The key factor is going to be when you plan to buy a house.
Are you wanting to buy in the short-term? If so, term deposits would be better – even though their potential returns are lower than that of shares/index funds, they will protect your valuable money from the volatility of the sharemarket.
If you aren’t buying a house for several years (or are willing to delay your house purchase) and you have a high risk tolerance then index funds could be a better option. While shares are volatile (and your $150k could certainly go down in value in the short-term), investing for several years would allow you to benefit from the higher potential returns that shares offer and give you time for your index funds to recover from any downturns you might face.
Further Reading:
– Whatβs the best short-term investment?
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Disclaimer
The content of this article is based on Money King NZ’s opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.
Thanks for continuing to do these Q&As. Always interesting to see what’s on people’s minds π
Hi
Here is an approach that I have not seen discussed.
It works for me as I have recently retired.
This is a personal perspective and not financial advice.
I accept there may be few of your readers who are in a position financially to make it work.
I ladder my term deposits over 5 years – there is a term deposit maturing every 3 months – interest is paid monthly into a safe bank cash account – currently I use BNZ Rapid Saver @ 4.55% – I understand that the bank cash account interest will vary.
I use term PIEs with major banks to take advantage of 28% tax rate and assess that I am at least as well off as investing in corporate or other bonds without addition of management fee.
Interest rates over time are averaged.
Provides me with steady income from interest that can be spent or reinvested or used to balance portfolio.
It does require have a good level of money to invest.
It provides convenience and security.
I use more than one bank for diversification and ability to take advantage of better interest rates.
I have not seen any information that makes me believe I am missing out by not having local or hedged international bonds as part of my portfolio.
As and aside:
As for the rest of my investments I use Kernel and Simplicity – if needed I can buy or sell and shift around the individual funds I have chosen at no significant cost – rebalancing or freeing up funds if necessary.
I have chosen individual funds in proportions that suit me as I do not like some of the investments included in their composite funds – that view may change in future.
I am comfortable with passive investing knowing that performance over 10 or more years will likely have my portfolio in the top 25% of performance.
Morningstar provides 3 monthly Kiwi Saver analysis – worth a look and draw your conclusions.
Cheers
Thank you for the informative post. Don’t think the fee comparison for Tiger is accurate. Tiger offers $2000 monthly free foreign exchange and 4 free transactions, so that pretty much covers $200 weekly investment IMO.
Hello MoneyKingnz,
Enjoyed this article once again.
Got a question I’m following your investment portfolio for Kernel i.e Global ESG, NZ50, and Infrastructure….
I’m at 15k now and I’m thinking about whether I should switch to Investnows Foundation Total World.
To avoid the $5 monthly fee. I normally invest about $150 per week.
I plan on leaving it there for about 5-10 years or more.
Do you think its worth switching to investnow?
Cheers,
Dave