Fixed Deposits

The Expected Risk:

At the time of writing it appeared that deposits with an ADI (“authorised deposit-taking institutions”, such as banks, credit unions and others) of up to $250,000 per customer per institution are guaranteed by the Australian government.  Although I have not enquired into the nature of the guarantee or whether it could be withdrawn during the term of the fixed deposit, I suppose I would have some justification for arguing that risk associated with such an investment (of up to $250,000 per ADI) would be close to what one might consider to be the ‘risk-free’ rate for most people.

The Expected Return:

 12-month fixed deposit interest rates at the time of writing appeared to range between about 2.0% and 3.0% per annum, with a few institutions offering more than 3.0% and many offering less than 2.0%. It also appeared that more well-known entities were offering rates towards the bottom of that range and lesser known entities towards the top of that range.

If I were to place funds on deposit with any ADI, I would (notwithstanding the government guarantee) sleep more peacefully if I placed an equal amount on fixed deposit with each of Australia’s ‘big 4’ listed banks (ANZ, CBA, NAB and Westpac) – as they are generally regarded to be financially sound and their financial positions are well scrutinised by the market. As a result, the return I could have expected (at the time of writing) was in the range of 2.0% to 2.5% per annum.

The Expected Return-for-Risk:

In short, one could reasonably expect to earn 2.0% to 2.5% per annum on an investment with minimal risk (close to 0%) of suffering a loss of capital or of not getting the contracted interest rate.  Deducting the expected risk from the expected return leaves one with a return-for-risk of 2.0% to 2.5% per annum.


Prepared by: Mark Morris