The power of investment funds

One of the best ways to grow wealth over the long term is to use investment funds. In recent years however, a pick-up in market volatility, cost of living pressures and more favourable interest rates on savings products such as term deposits may have had you questioning what’s the best investment strategy going forward.

We believe there’s a case to be made for sticking with investment funds. Through diversification, professional management and easy access to your savings, investment funds allow you to navigate the complex world of investing with confidence.

First and foremost, investment funds allow you to diversify your holdings across a wide range of investment assets, thereby spreading your investment risk. By investing in shares, bonds, property and infrastructure assets, not only do you get exposure to different types of investments, regions and sectors, but your investment can be cushioned from the poor performance of a specific company or sector.

Another good reason to invest in funds is access to professional management. We make informed decisions on your behalf and have access to extensive research and resources. It helps us identify promising investment opportunities and steer away from potential pitfalls.

Economies of scale also have a part to play as money is pooled together with that of other investors. It means you can get access to investment opportunities that may not be available to individual investors, as well as to specialist investment managers with proven track records. 

We also employ a number of strategies to manage investment risk. For example, we use currency hedging and tools, such as futures, to mitigate potential losses. Plus, our investment funds make the most of New Zealand’s tax rules to minimise the impact for you. 

You would have noticed that term deposits have become a seemingly attractive investment of late, offering interest rates of around 6% for a 1-year fixed rate term. With very low risk, these may seem like a better way to invest for the future. However, a downside is they don’t always protect your investment from the effects of inflation which, in New Zealand, is also running at an annual rate of 6.0%—. After inflation and tax, your real return is potentially low, if not negative.

Meanwhile, investment funds give you access to growth assets, such as shares, property and infrastructure investments, which can protect your money from the effects of inflation. For example, ANZ’s investment funds have exposure to global shares – which over the last year, have returned over 17%—.

That’s not to say there isn’t a place for term deposits as part of your investment strategy, but there’s certainly a risk to putting all your money here if you’re saving for a long-term goal, such as retirement. Also, if you need your money at short notice, you may need to forfeit interest to get to it.

It’s easy to get distracted by the short-term noise in markets. Take the last three months, where most investments have fallen in value due to the idea that interest rates could stay ’higher for longer’. But it’s easily forgotten that longer term performance can be strong and often excludes the frequent ups and downs that financial markets experience. For example, while investors in our Balanced Growth Fund have seen losses of 3.23% over the three months, over one year they’re actually up 7.39%—.

It’s true that the returns for investment funds can be both positive and negative, and the value of your investment can go up and down, but this is a part of investing. This chart shows the track record of ANZ’s Investment Funds since their inception, compared to a rolling six-month term deposit. As you can see, there were periods when the returns from term deposits were higher, but you can easily see the long-term trend.

If you’re the type of investor who reacts to the latest news and frequently switches asset allocations, then you’re taking on significant risk of realising poor returns going forward. And if the next couple of decades are anything like the last few, you may not succeed in making gains and beating inflation.

But, if you’re an investor with a long-term plan and you stick to it, you’re more likely to realise the returns of the markets you participate in, most of which are quite attractive over long periods of time, such as 20 years.

But as with any investment, due diligence and a clear understanding of your financial goals are essential. When things get tough, remember why you invested and refer back to your financial plan. If you’re still worried, talk to your financial adviser.

With the right approach, sound advice and a long-term view, we think investment funds can be pivotal in building you a prosperous financial future.