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.
More on managed funds.
Risk levels in KiwiSaver and other manager 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:
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 safe is KiwiSaver?
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.
Because of this, your balance in a managed fund that holds just bonds or bonds and cash can fall sometimes.
For more about bonds see the FMA’s 'Bond voyage' guide.
This content is reproduced from ‘Hits and Myths: an introductory guide to investing by Mary Holm’.