Investors should be wary of over-reliance on cash and term deposits which look set to lose their appeal if the Reserve Bank of Australia (RBA) cuts interest rates as expected, an MLC investment strategist said.
Michael Karagianis said investors have focused heavily on income-based investments, such as cash, term deposits and government bonds, since 2008 when the global financial crisis began to slam share market returns.
Karagianis noted deposits had returned 6 to 7 per cent in 2012 and bond funds, in some cases, had delivered nearly 10 per cent.
"In this context, it is not uncommon to see investors, particularly those in or approaching retirement, to focus on cash and bond-based investments," he said.
"However, it's very unlikely that cash and bond investments alone will generate this level of return in the future."
Karagianis said rate cuts by the RBA had pressured term deposit rates below 6 per cent. The official cash rate stands at 4.25 per cent but the RBA is widely expected to reduce it when it next meets on 7 February.
"Plus, bond yields have declined significantly over the past year. While this has reaped benefits for bond investors to date, future returns will be significantly less," he said.
He said investors needed to branch out to more sophisticated investment strategies to get sustainable returns while actively managing capital risk.
"By failing to do so, investors risk returns from simple income strategies not delivering enough to sustain retirement savings."
National Australia Bank term deposits have attracted nearly $400 million since they were first added to the MLC MasterKey Fundamentals' investment menu seven months ago.
Meanwhile, AMP Bank has increased its interest rates for six-month and 12-month term deposits. The respective increases are by 40 basis points to 6 per cent per annum and 15 basis points to 5.50 per cent per annum.
"With continued market volatility, investors are looking for high-return, low-risk investments," AMP Bank chief operating officer Rob Slocombe said.
However, AMP Capital head of investment strategy Shane Oliver said the broader picture for shares is favourable on the back of factors including low bond yields, a receding risk of a meltdown in Europe, monetary policy easing and the wall of cash on the sidelines.
"We expect a good year for shares overall and continue to see the S&P/ASX 200 pushing up to 4800 by year end," Oliver said in his latest weekly market update.
