In this era of low interest rates, many investors who would normally invest in a term deposit are instead looking further afield to potentially higher-yielding assets such as managed funds.

While this may seem like an easy way to boost income, it is important to be aware that these are very different asset classes with different levels of risk.

Here, we explain what each investment is, and why they are both considered to be important components of a diversified investment portfolio, rather than substitutes for each other.

Term Deposits

A term deposit is a cash investment held at a bank or a credit union. Your cash is invested for an agreed period of time (the term), at a pre-determined rate of interest.

When you deposit your money, you know it is there for a specific period which usually ranges from 1 month to 5 years. The interest rate is fixed and will not change for that period of time.

The money can only be withdrawn at the end of the term without penalty. If you withdraw earlier, you will incur an extra fee.

Term deposits are covered by the Federal Government’s Deposit Guarantee up to $250,000 per account holder per ADI . They are popular with investors who prefer capital security and a set return, instead of the volatility of shares or property.  Many investors also use term deposits as one part of a diversified portfolio, along with shares, bonds, and property.

Pros of Term Deposits

Cons of Term Deposits

  • Government- Guaranteed

  • Known income return

  • No flexibility

  • No potential for capital gains

  • Early withdrawal fee

Managed Funds

When you invest in a managed fund, your money is put into a pool with other investors. The manager of the fund then buys and sells assets, including shares, bonds and term deposits, with the money.

You don’t own those investments directly, the fund owns them, and you own units in the fund. The value of your units in the fund will rise and fall broadly in line with the value of the assets it holds. Most managed funds pay income to investors called “distributions”, which will increase or decrease depending on the income earned by the assets in the fund, and any capital gains. If a fund does well in one year, there's no guarantee it will in subsequent years.

Because there is no fixed rate of return, there’s no cap on the potential return you might receive. On the other hand, there is also a risk that you may lose some or all of the money you invested.

Over the long-term, managed funds usually generate greater returns than term deposits, although they will fluctuate over time.

The composition of managed funds varies enormously depending on what they invest in. They are typically classified by what they invest in. Common types include a Balanced Fund (with many different assets including cash), Australian Shares, International Shares, Fixed Interest Investments and Listed Property Trusts.

Pros of Managed Funds

Cons of Managed Funds

  • Potential for higher long-term return

  • Easy to add or withdraw funds

  • Not Government Guaranteed

  • Volatile income

  • Complexity


Terms deposits and managed funds are both popular investment classes. Managed funds tend to average higher returns in the long run, but their value is relatively volatile. Consequently, they are generally regarded as more suitable to investors with a medium to long term time horizon. By contrast, term deposits are by far the simpler and lower risk investment. Both are worthy of consideration in a balanced portfolio.

Term Deposits

If you are considering investing in a term deposits as part of your portfolio, Firstmac offers competitive rates and terms ranging from one month to two years.

All Firstmac term deposits are covered by the Australian Government Guarantee up to a sum of $250,000 per account holder.

Find out more about our term deposits here