Thousands of New Zealanders have stumbled into KiwiSaver, by being auto-enrolled when they got a new job. And too many of them haven’t taken much interest since. On the other hand, some other KiwiSaver members watch their accounts closely.
Whatever your attitude, your KiwiSaver account is certainly an investment, and a really good one at that. The government contribution of up to $521 a year, and employer contributions for employees, make KiwiSaver hard to beat compared with other investments at a similar risk level.
A KiwiSaver fund is a type of ‘managed fund’. The managers of these funds pool money from many people and buy a large number of investments.
This means that, with even a small deposit, you are in a wide range of investments, which reduces your risk. And the managers take care of details such as receiving interest and dividends.
But you have to pay fees for this, which can make a big difference to your returns over the years. Look for funds with fees below 1% of your investment each year, if possible.
The main difference between KiwiSaver and other managed funds
Apart from the government and employer contributions, the main difference is that KiwiSaver money is generally tied up until you buy a first home or reach 65. In most other managed funds you can withdraw money whenever you want to.
Keep accessibility in mind when you invest. While it’s great to contribute enough to KiwiSaver to get the incentives, you might want to do further saving in a non-KiwiSaver fund so you can withdraw the money if needed.
On the other hand, if you might be tempted to spend long-term savings, perhaps you should lock away your money in KiwiSaver!
Some non-KiwiSaver managed funds are traded on the stock exchange. Unsurprisingly, they are called exchange-traded funds, or ETFs. From the investor’s point of view, ETFs work very much like other managed funds.
Both inside and outside KiwiSaver, managed funds come with varying levels of risk. Some funds hold only low-risk investments – such as bank deposits and high-quality bonds – so your balance is likely to grow fairly slowly but steadily.
Others hold largely higher-risk investments – such as shares and property – which means your balance will go up and down, occasionally falling a long way. In the long run, though, your balance will probably grow more in a higher-risk fund.\
Here are the different risk levels:
Defensive funds have the lowest risk. Usually all of their investments are in bank term deposits and the like – sometimes called ‘cash’ – and perhaps some low-risk bonds.
Conservative funds come next. The managers add some shares to the mix, but they are never more than about a third of all the investments. The rest are lower-risk.
Balanced funds have more shares. Typically they are roughly half shares (and perhaps some commercial property) and half bonds and bank deposits.
Growth funds hold anything from about two thirds to nearly 90% shares and perhaps property, with a small chunk of lower-risk investments.
Aggressive funds are pretty much all shares, with property sometimes added in. They are fairly high-risk investments.
Some managed funds invest in only one type of asset. For example, a fund that invests only in bank term deposits would be included in defensive funds. And a fund that invests only in shares or only in property would be included in aggressive funds.
If you’re in a default fund – where you landed at the start – it’s a good idea to check if the risk level is right for you.
The idea behind this wide range of choices is that people can choose the type of fund that suits them best.
The best type of fund for you
This depends on:
How soon you expect to spend the money. If you’re planning to withdraw it within three years – to buy a first home, or spend in retirement – it’s best to be in a low-risk fund. But if your spending time is decades away, it’s better to be in a higher-risk fund. We’ll explain risk more in the next myth.
How well you can cope with seeing your balance go up and down – especially down! Some people can take that in their stride, knowing that managed funds always recover in the end. But others worry too much.
All investment comes with risk, and the government does not guarantee KiwiSaver. But the FMA monitors it closely.
If a provider gets into financial trouble, that should not greatly affect KiwiSaver members. It’s the job of the supervisor of the scheme, which is independent from the provider, to supervise the provider’s management of the scheme and its financial position. The supervisor (or another custodian) also holds the investments on trust for the KiwiSaver members. If your provider does get into financial trouble, your account would be transferred to a new provider.
A bit more about bonds
I said before that bonds are like term deposits. But one way they differ is that you can usually buy or sell a bond partway through its term. Because of this, bonds fluctuate in value. How come?
Let’s say you pay $10,000 for a newly issued five-year bond paying 4% interest, but want to sell it after three years.
If interest rates have fallen in the meantime, 4% will look good, so a keen buyer will pay you more than $10,000.
If rates have risen, your 4% bond will be unattractive, so you’ll have to sell it for less than $10,000.
Because of this, your balance in a managed fund that holds just bonds or bonds and cash can fall sometimes.