Are Cash Deposits Safe? Why Investors are Turning to Fixed Interest Securities
When it comes to cash deposits in a bank account, safety is not always guaranteed. As a result, many investors are shifting their focus to fixed interest securities, or bonds, which offer more stability and potentially higher returns.
In Australia, there is currently $2.8 trillion held in deposit accounts, with $1.6 trillion in transaction accounts and $1 trillion in non-transaction accounts. While savings accounts offer quick access to funds, cash held in term deposit accounts is considered an investment.
However, many people mistakenly believe that cash is a risk-free asset, but this is not entirely true. The low-interest rates over the past decade have resulted in negative real cash returns. Therefore, investors looking to invest their cash may consider fixed interest securities as an alternative.
Bonds are considered a lower-risk investment option as they are securities issued by governments or companies that they use to borrow money. Investors buying bonds can expect to receive full repayment of their principal and steady regular interest payments until maturity. Bonds are typically less volatile than shares and are expected to outperform cash over the long term.
Investors worldwide are increasingly turning to high-grade bonds, particularly government-issued bonds, for higher-returning, low-risk investments. Rising interest rates have led to higher yields, making bonds more attractive to those seeking steady income streams. Additionally, once inflation levels fall back, it’s likely that central banks will cut interest rates, leading to higher bond trading prices. Lastly, the traditional role of bonds in investment portfolios is to provide diversification to help smooth out total investment returns over time.
As more investors use bonds to capitalise on higher interest rates and the potential price upside from markets, the amount of cash held in low-yielding financial institution accounts may decrease.
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GENERAL ADVICE AND PAST PERFORMANCE WARNING
This article has been prepared by United Global Capital Pty Ltd (ACN: 154 158 273, ABN: 25 154 158 273, AFSL: 496179).
This article contains general information only and is not intended to provide any person with financial advice. It does not take into account any person’s (or class of persons) investment objectives, financial situation or particular needs, and should not be used as the basis for making any investment or financial decisions. United Global Capital Pty Ltd does not make any representation as to the accuracy, completeness, relevance or suitability of the information, conclusions, recommendations or opinions contained in this article (including, but not limited to any forecasts made). No liability is accepted by United Global Capital Pty Ltd or its directors, officers, employees, agents or advisors for any such information, conclusions, recommendations or opinions to the fullest extent possible under applicable laws.
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