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Active or Index Funds: What’s Your Best Bet?

23 January, 202425 January, 2024 Updated on25 January, 2024 Investing

Ever glanced at a list of different managed funds and wondered why some have remarkably low fees compared to others? Chances are, the ones with lower fees are index funds, also known as passive funds. Over the last couple of decades, index investing has become increasingly popular, with big players like Vanguard and Blackrock managing trillions of dollars in assets (as of 2022). Before we dive into the reasons and consequences of this trend, let’s break down the two main investment styles: Active Investing: Index Investing: So, why has index investing gained so much ground? 1. Lower Fees: 2. Performance Challenges: For instance, at the end of 2022, 58% of Australian General Equity funds returned below the index. Over 5-, 10-, and 15-year horizons, the underperformance proportions were 81%, 78%, and 83%, respectively. Similar trends are observed in international equity markets. While choosing index funds may seem logical, it’s essential to consider their underlying premise. Returns come from income (like dividends) and changes in capital value over time. However, for the latter to happen, there must be market activity—investors trading securities. If everyone exclusively invested in indexes, the market would cease to exist. Index investing doesn’t screen shares, meaning investors get exposure to both ‘good’ and ‘bad’ companies. Also, there are no exclusions based on environmental, social, or governance (ESG) criteria, which some investors prioritise. In the active versus index debate, there’s no clear right or wrong. Many investor portfolios combine both approaches. Index funds or ETFs are often used for broad exposure, while active investment may be reserved for specialised exposure, such as smaller companies, property, or infrastructure. Regardless of your choice—active, index, or a mix—the fundamental principles of investing still apply: diversification and time in the market are key to building long-term wealth. The information provided in this article is general in nature only and does not constitute personal financial advice. 

The difference between a savings account and a term deposit

15 February, 20239 February, 2023 Updated on9 February, 2023 Education, Investing

Depositing cash in a savings account or a term deposit are the most common ways to invest your money. But, how do you know which is right for you? First, let us explain their main differences and impact on your money. What is a savings account? A savings account is a deposit account held at a bank or other financial institution that earns interest. Benefits Easy access to your money at any time, while the remaining balance earns interest. You can save more by depositing more at any time. Savings accounts are eligible for the Australian Government’s Financial Claims Scheme, which protects against the failure of an authorised deposit-taking institution (ADI) (such as banks or credit unions). The government guarantees deposits of up to $250,000 per account-holder per ADI. Downsides You may need to link your high-interest saving account with a transaction account to meet certain conditions, such as depositing a minimum amount every month or limiting your withdrawal frequency. As interest rates can vary, your earnings will also fluctuate. You may be tempted to spend more given the easy accessibility of funds. Fees Most banks do not charge a savings account fee; however, some may charge an account keeping fee. Possible Tax outcome Interest earned is treated as investment income and taxed at your marginal tax rate. What is a term deposit? A term deposit is also a type of deposit account held at a bank or financial institution, with money kept for a set period of time at a fixed interest rate. Benefits The interest rate is guaranteed and does not fluctuate. You can invest in multiple term deposits of different terms and interest rates. For example, you can invest $15,000 in a 6-month term deposit earning 1% p.a. and $5,000 in a 12-month term deposit earning 1.50% p.a. They too are eligible for the Australian Government’s Financial Claims Scheme. Downsides If you want to access your money before the term finishes, you may be required to notify your bank at least 31 days prior, except under special circumstances. If interest rates increase, you cannot benefit as your money is already locked away at a fixed rate. Banks usually have a minimum balance requirement for a term deposit of approximately $1,000 to $5,000. It may be a considerable risk if you do not want to lock away that much of your savings or have just commenced your savings journey. Fees Banks usually do not charge any fee on a term deposit. However, if you want early access to your money, there may be an early withdrawal fee and loss of interest for the remaining term. Possible Tax outcome Interest earned is treated as investment income and taxed at your marginal tax rate. Which is better for your needs? Interest rates, accessibility of funds, and fees are key factors to consider. If you want a guaranteed income, term deposits are the way to go. However, if you want easy access to your money, use a savings account. Alternatively, you may keep some funds in a savings account for daily expenses or an emergency and invest the rest in a term deposit. Ultimately, the right decision for you will depend on your budget and financial requirements. The information provided in this article is general in nature only and does not constitute personal financial advice.

Unlocking the mysteries of your super statement

8 December, 20211 December, 2021 Updated on1 December, 2021 Superannuation

Superannuation statements. Boring, right? But if, like many people, you toss your annual super statement in a drawer or hit delete, you could be depriving yourself of many thousands of dollars just when you need it. So, it’s worth the small effort to take a closer look at your superannuation statement. A quick check of your statement may reveal some of the common problems that occur with super; and the sooner these are fixed the quicker your savings can increase. What to look for The layouts of statements vary between super funds, but there is standard information that must be provided. Some items may appear in summary form, with a detailed breakdown shown elsewhere. Here are the key things to look for: Contributions or funds in This will cover employer and personal contributions, government contributions and rebates, plus any rollovers. If you’re an employee earning more than $450 per month, your employer should be paying 10% of your ordinary time earnings to your super fund. Payments can be made either quarterly or monthly. Funds out Most commonly this comprises administration and investment management fees, and any insurance premiums. Excessive fees can place a real drag on the performance of your savings, so check that they are competitive with other funds. Investment earnings This covers interest and share dividends, along with any capital growth in the value of your investments. Be aware that depending on your specific investment mix and the performance of markets, this figure may sometimes be negative. Insurance cover Your super fund may provide death and/or disability insurance. If so, check that it is appropriate and adequate for your needs. Maybe you are paying for insurance cover you don’t need or are inadequately insured. Investment options This will show what your money is invested in, and in many cases the performance of each investment. Your investment choices will be one of the main influences on the ultimate value of your retirement savings. Professional advice in this area is strongly recommended. Other things to check Have you provided your tax file number? If not, the fund will be deducting too much tax from your contributions and earnings. Have you made a binding death benefit nomination? This allows you to choose, within applicable rules, who your superannuation is paid to upon your death. Is your name and address up to date? Is it possible you have ‘lost super’? This occurs when a super fund can no longer contact you. The Australian Tax Office can help you find lost super. Start here https://www.ato.gov.au/forms/searching-for-lost-super/ More than one statement? Ideally, you should consolidate all your superannuation into one fund. This will avoid duplication of fees and insurance premiums and make your super much easier to manage. Invaluable advice Super is one area in life where professional advice can really pay off. If you need help with understanding investment options, consolidating multiple super funds, finding lost super, or ensuring you have the right insurance cover, talk to your financial adviser. The sooner you do, the sooner you’ll be on track to growing your super pot of gold. The information provided in this article is general in nature only and does not constitute personal financial advice.

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