Search

Cash Funds - The Definitive New Zealand Guide

Our guide explains what cash funds are, who invests in them, the pros, cons and alternatives (like term deposits and retirement income funds) and lists cash funds available to everyday investors.
Updated 25 January 2024

Summary
Our guide has been published to provide clear, detailed information about cash funds and how these funds can fit into your overall financial strategy. Whether you're looking to safeguard your capital or seeking a stable investment option, cash funds can play a key role in achieving your financial goals, and given the increases in interest rates, they've never been more popular.

We cover:
Know This First: The interest earned from cash funds is not fixed; it fluctuates depending on the performance of the underlying investments. If you are looking for an investment with a fixed interest rate, we recommend exploring our comprehensive guides on the following options

MoneyHub Founder Christopher Walsh shares his comments on cash funds

"Cash funds are a sensible choice for New Zealand investors looking for safety and quick access to their money. These funds are ideal for those who prioritise capital preservation over high returns. They offer a stable investment option and a reliable option for investors needing liquidity. Cash funds are arguably well-suited for retirees and individuals who want to protect their wealth while maintaining some growth potential.

The value of cash funds lies in their ability to offer daily liquidity and predictable returns. This makes them a practical addition to a diversified investment portfolio, given they maximise returns while eliminating the restrictions of locking up money in a term deposit with a fixed term.

Understanding the pros and cons of cash funds is crucial for any investor - while they offer lower returns than many other asset classes, their stability and protection against market volatility are significant advantages. For this reason, it's essential to balance the potential for lower returns against the benefits of capital preservation and ease of access".
Christopher Walsh
MoneyHub Founder

What are Cash Funds? Who Invests in Them?

  • Cash funds are investment funds that aim to provide investors with stable returns while preserving their capital. This means they're not investing in shares (which can go down in price) but rather cash assets such as term deposits, short-term bonds and short-term deposits.
  • Cash funds are designed for investors who want safety and liquidity over higher returns, making them popular with retirees and other New Zealanders wanting to preserve their wealth or maintain a portion of their portfolio in a low-risk investment. Typically, diversified portfolios (like KiwiSaver funds) have a small allocation to cash for liquidity and diversification purposes, which is invested in this sort of strategy.
  • A range of managed cash funds are available to New Zealand investors, designed to outperform the benchmark, typically the S&P/NZX Bank Bill 90-Day Index. They do this by selecting high-quality short-term debt securities. 
​
Examples of managed cash funds include Milford Asset Management's Cash Fund, Smartshares' NZ Cash ETF and Kernel's Cash Plus Fund.

Pros and Cons of Investing in Cash Funds

Pros:
  1. Capital Preservation: Cash funds invest in low-risk instruments, making them an ideal choice for investors seeking to preserve and protect their capital from market volatility. The underlying investments aren't likely to fall in value, given they're cash-focused, which differs greatly from shares and longer-term bonds. 
  2. Liquidity: Most cash funds offer daily liquidity, allowing investors to withdraw their funds at any time, making them suitable for anyone needing access to their money at short notice. Note that some funds will take a couple of business days between redeeming the fund and the money being back in your account.
  3. Diversification: Adding cash funds to an investment portfolio can provide diversification benefits by reducing overall portfolio risk, given cash funds are stable. The funds themselves are also diversified across a wide number of issuers.
  4. Portfolio Investment Entity (PIE) structure: Many cash funds are set up as PIEs, which means they are designed to cap the tax charged on returns at 28%, which benefits higher-earning taxpayers. This compares favourably with many term deposits that aren't PIEs and charge investors as much as 39% (depending on their PAYE tax rate). However, more banks are introducing PIE Term Deposits, as outlined in our dedicated guide.
  5. Predictable Returns: Cash funds generally offer more predictable and stable returns than other investment options, making them suitable for risk-averse investors.
  6. Returns compound daily: The assets of cash funds are invested constantly, with the return accruing and compounding daily (meaning the unit prices typically grow a bit daily).

Cons:
  1. Lower Returns: Due to their focus on capital preservation and low-risk investments, cash funds typically provide lower returns than other asset classes, such as equities or property.
  2. Inflation Risk: The returns on cash funds may not keep pace with inflation, eroding the purchasing power of an investor's capital over time. In 2023, inflation is running around 7% p.a., whereas cash funds are returning around 5.50% p.a. pre-tax. This means the value of an investment is still being eroded until inflation returns to the target 1-3% level and cash funds return above that.
  3. Management Fees: Most management fees for managed cash funds are relatively low, but investors should be aware that fees can eat into the returns generated by the fund.
  4. Interest Rate Sensitivity: Interest rate changes can impact cash funds' returns. Cash funds may struggle to generate attractive returns when interest rates are low, as was the case in the 2020-2022 historic low-interest period, where cash funds struggled to earn above 1.00% p.a.

Typically, investors use cash funds as an alternative to bank term deposits and on-call deposits. They potentially offer the following benefits over bank term deposits:
  • Higher returns, noting that this will be a function of the interest rate market when you invest. 
  • Investment managers can invest the fund through the wholesale money market, getting the higher return premium often available for large investors.
  • More diversified. A bank term deposit is with a single bank, making you an unsecured bank creditor. 
  • More liquid. Your investment in a managed cash fund can normally be redeemed in a couple of business days without any penalties or break costs.
  • Daily compounding.
  • No reinvestment hassles.

Cash Funds Available to Everyday New Zealand Investors

Managed Cash Funds
Bank Cash Funds
  • Most banks have cash and term deposit PIEs, as outlined in our dedicated review to PIE Term Deposits.

Our Top-Rated Cash Fund With Day-to-Day Flexibility

​Best Cash Fund for Wealth Creation and Flexibility:
  • ​Savvy is a novel approach to managing your funds, blending everyday transaction ease with impressive returns. Unlike traditional bank accounts, which offer zero or low interest rates, Savvy isn't just a place to store your money; it's an investment in the Booster Savvy Fund, managed by Booster.
  • Booster is not a bank. This means a Savvy account is not a bank account. It does, however, provide transactional account functionality.
 
​What sets Savvy apart?
  1. High Returns: Enjoy a significant 5% p.a. return, reviewed monthly, with the potential for additional quarterly bonus returns.
  2. Instant Access: Withdraw your funds anytime, anywhere, with no penalty to the return you earn - a flexibility rare in the world of transaction accounts.
  3. Mastercard Debit Card: Thanks to the convenient Booster Savvy Card, your funds are always at your fingertips, usable throughout New Zealand and around the world wherever Mastercard is accepted.
  4. Payments: With Savvy you can make and receive payments to New Zealand bank accounts, set up automatic payments and use your card to pay subscriptions like Netflix or SkySport. Savvy does not allow Direct Debits however.
  5. Tax Efficiency: Structured as a PIE, Savvy is taxed at your PIR, capped at 28%, optimising your returns.
  6. Organise Your Funds: Savvy lets you divide your money into multiple 'stacks', automating your financial management plus it has savings tools and spending insights
  7. Digital First: Embrace the future with an app-based investment experience, available on both the App Store and Google Play.
  8. No Minimum Balance: Every cent in your account earns interest.
  9. 24/7 Access: The digital platform ensures that your funds are accessible anytime through the app and debit card, usable on the Mastercard network, EFTPOS and across ATMs.

Savvy arguably redefines how we think about money management, merging the convenience of a debit card with the benefits of an investment fund, all while offering impressive returns. It's a forward-thinking solution for those who want their money to work harder for them without sacrificing accessibility or ease of use.​

More details: Our Savvy Review explains the product in detail, as does the Savvy website.

How do I Compare and Choose a Cash Fund?

No cash fund is like another, despite potentially having similar underlying investment portfolios and benchmarks. To compare cash funds and ensure you get an investment that delivers long-term results, we suggest considering the following steps:
  1. Read the disclosure material: Read the fund's disclosure material, including the Product Disclosure Statement. The Other Material Issuers, SIPO, and Quarterly Fund Update all provide useful information. Managers are also required to publish a full list of securities for any registered fund every six months. This is useful for showing how diversified a fund is, plus the types of investments it holds. All of this information is available on the regulator's Disclose Register (https://disclose-register.companiesoffice.govt.nz/)    
  2. Compare historical returns: Review the past performance of various cash funds to understand their returns. Remember that past performance does not guarantee future results, but it can provide insight into how the fund has performed in different market conditions.
  3. Evaluate fees: Compare the management fees and any entry/exit fees associated with each fund. Lower fees can lead to higher net returns over time, but you'll need to balance these against the net returns. 
  4. Examine the fund manager: Research the fund manager's reputation, experience, and track record in managing cash funds. A cash fund managed by a well-regarded company may offer better potential for returns and risk management.
  5. Review the fund's tax structure: Check if the cash fund is structured as a Portfolio Investment Entity (PIE) to take advantage of potential tax benefits if you're on a higher tax rate.
  6. Liquidity and accessibility: How long can you withdraw your money take? Most cash funds provide easy access to your investment when needed, but check the time it takes to redeem (e.g. selling and being paid into your bank accounts) before investing.

Important: Once you have invested in a cash fund, continually review its performance and consider whether it meets your investment objectives. If you see term deposits advertised that offer a rate above what you believe your cash fund is earning, you can redeem the fund at any time and reinvest accordingly.

Cash Funds vs Term Deposits - Similarities and Differences

Differences:
  1. Investment structure: Cash funds are pooled investment vehicles that invest in a range of short-term, interest-bearing assets, whereas term deposits are individual fixed-term bank accounts that pay a predetermined interest rate.
  2. Potential for higher returns: Over a full market cycle, cash funds should provide higher returns than bank term deposits, reflecting that investors get access to the rates available within the wholesale money market. 
  3. Liquidity: Cash funds typically offer daily liquidity, allowing investors to access their money anytime. In contrast, term deposits have a fixed term, and withdrawing funds before maturity will incur penalties, a loss of interest, or both.
  4. Diversification and credit quality: Cash funds invest in a diversified portfolio of securities, whereas a bank term deposit is exposed to one party. Often the securities held within cash funds provide better credit terms than a term deposit, reflecting that investors in term deposits become unsecured creditors of the bank.
  5. Interest rates: Cash funds' returns fluctuate based on the performance of their underlying investments, whereas term deposits offer fixed interest rates for the entire term. For example, if you invest with a bank for six months at 5.85% p.a., you will receive just that. 
  6. Compounding returns: The assets of cash funds are invested constantly, with the return accruing and compounding daily (meaning the unit prices typically grow a bit each day).  
  7. No reinvestment hassles: Investors using term deposits are also faced with reinvesting them as they mature.
  8. Management: Cash funds are managed by investment managers, while banks or other financial institutions directly manage term deposits.

Similarities:
  1. Capital preservation: Both cash funds and term deposits prioritise capital preservation and generally carry a low risk.
  2. Income generation: Both investment options aim to generate income through interest payments.

Factors to consider when choosing between cash funds and term deposits:
  • Investment horizon: If you have a short investment horizon or need immediate access to your funds, cash funds may be more suitable due to their liquidity. Term deposits may offer higher interest rates and more stable returns for longer investment horizons where you don't require access to your funds.
  • Risk tolerance: Both cash funds and term deposits are considered low-risk investments. However, term deposits carry lower risk due to their fixed interest rates and backing by banks, whereas cash funds may be exposed to slight fluctuations in returns due to changes in the underlying investments.
  • Return expectations: Term deposits typically offer fixed interest rates, which can provide stable and predictable returns. Cash funds' returns can vary based on the underlying investments' performance, but they may have the potential to outperform term deposits in certain market conditions.
  • Access to funds: If you need frequent access to your money or the flexibility to withdraw without penalties, cash funds may be more suitable due to their liquidity. For investors who don't require immediate access to their funds, term deposits can be a better choice.
  • Tax implications: The tax implications of cash funds and term deposits may differ based on your tax situation and the investment structure. Cash funds structured as Portfolio Investment Entities (PIEs) offer tax advantages, while non-PIE term deposits are subject to the Resident Withholding Tax (RWT).
  • Fees: Cash funds may have associated fees, such as management and entry/exit fees, which can impact your overall returns. Term deposits usually don't have such fees, but early withdrawal penalties may apply if you need to access your funds before the maturity date.
  • Inflation risk: Both cash funds and term deposits can be exposed to inflation risk, as their returns may not keep pace with rising prices. However, cash funds might have a slightly higher potential to outperform inflation compared to term deposits due to the diversified underlying investments.

Cash Funds vs Retirement Income Funds - Similarities and Differences

Retirement income funds and cash funds in New Zealand have different purposes and distinct characteristics. To explain this better, we've listed key differences between these two types of investment options:
  1. Investment Objective: Retirement income funds are designed to provide a regular income stream during retirement while preserving capital and, in some cases, aiming for modest growth. On the other hand, cash funds primarily focus on capital preservation and liquidity, aiming to generate stable, low-risk returns.
  2. Investment Strategy: Retirement income funds typically invest in a diversified mix of assets, shares, and income-producing securities. This diversification helps to balance the risk and return profile of the fund. Cash funds invest exclusively in short-term, interest-bearing assets such as term deposits, government bonds, and corporate debt securities, resulting in a lower-risk portfolio.
  3. Return Potential: Due to their diversified investment strategy, retirement income funds have the potential for higher returns compared to cash funds. However, these higher returns come with increased risk exposure. Cash funds offer lower but more predictable returns, focusing on capital preservation and short-term, interest-bearing assets.
  4. Liquidity: Cash funds typically offer daily liquidity, allowing investors to access them anytime. Retirement income funds usually provide liquidity, but the terms and frequency of withdrawals can vary depending on the fund. Some retirement income funds may have specific withdrawal conditions, such as minimum withdrawal amounts or limits on the number of withdrawals per year.
  5. Payout Structure: Retirement income funds are designed to provide a regular income stream, usually through fortnightly or monthly cash payments, to complement NZ Super payments. Cash funds, on the other hand, may pay interest income on a similar schedule or reinvest the income back into the fund for compounding growth.
  6. Tax Implications: Both types of funds may be structured as Portfolio Investment Entities (PIEs) in New Zealand, offering tax advantages to investors. However, the tax implications depend on the individual fund and the investor's tax situation.

Know This: Retirement income funds can be more suitable for investors seeking a balance of income and growth during their retirement years. On the other hand, cash funds can better fit those prioritising capital preservation and liquidity.

Frequently Asked Questions

Our list of common questions below helps explain cash funds further - however, if you're uncertain about any investment, do not proceed without being fully comfortable. If you have any specific questions on cash funds we've not covered, please contact our research team.

How safe are cash funds?

Cash funds are generally considered low-risk investments because they invest in short-term, interest-bearing instruments such as term deposits, New Zealand government bonds and corporate debt securities. However, while cash funds prioritise capital preservation, no investment is risk-free. Therefore, reviewing each fund's risk profile and ensuring it aligns with your risk tolerance is essential. In contrast to a bank term deposit, a managed cash fund provides diversification across several different borrowers.

What are the tax implications of investing in cash funds?

Many cash funds in New Zealand are structured as Portfolio Investment Entities (PIEs). PIEs offer tax advantages, such as taxing investors at their prescribed investor rates (PIRs) instead of applying a flat tax rate to the fund's earnings. PIRs are determined by an individual's taxable income and are generally lower than the top marginal tax rate.

What are the fees associated with investing in cash funds?

Fees associated with cash funds can include management fees and, in some cases, entry/exit fees (if the fund charges them).

How do cash funds compare to other investment options regarding returns?

Cash funds generally offer lower returns than other investment options, such as shares or growth funds, because they focus on capital preservation and low-risk investments. However, they provide more predictable and stable returns, making them suitable for risk-averse investors or those seeking to diversify their portfolios. Moreover, over a full market cycle, they should provide higher returns than bank term deposits, reflecting that investors get access to the rates available within the wholesale money market. 

How liquid are cash funds?

Most cash funds offer daily liquidity, allowing investors to withdraw their money anytime. This feature makes them suitable for investors needing access to their investments on short notice. However, it's essential to confirm the liquidity terms of each fund before investing.

Do cash funds protect against inflation?

Cash funds may struggle to keep pace with inflation, as their returns are typically lower than other asset classes. Inflation can erode the purchasing power of an investor's capital over time, so it's essential to consider this risk when investing in cash funds. In addition, diversifying your portfolio with other asset classes can help mitigate the impact of inflation on your overall investment returns.

How can I start investing in cash funds in New Zealand?

To start investing in cash funds in New Zealand, you can follow these steps:
  1. Research available cash funds - our guide serves as an overview, but it's always best to explore further.
  2. Read each fund's disclosure material to make sure you understand where your money is going.
  3. Compare their features and performance - which fund performs the best in 1-3 years etc?
  4. Choose a suitable fund based on your investment objectives and risk tolerance - while cash funds are usually the same in terms of risk, that's not always the case, so make sure you understand what you're investing in.
  5. Open an account with the fund provider - you may be required to provide identification documents and complete a risk assessment questionnaire during the account opening process. Once your account is set up, you can deposit funds and begin your investment. 

What are some alternatives to cash funds?

Alternatives to cash funds include term deposits, PIE term deposits, bond funds, property, and other conservatively managed funds. Each investment option has its risk and return profile; our guide covering alternatives to term deposits has more details.

How do interest rate changes affect cash funds?

Interest rate changes can impact the returns on cash funds, reflecting that they determine the yield on the underlying portfolio. Higher interest rates generally equate to higher returns. In an environment where interest rates rise suddenly, potentially, the value of existing short-term fixed-income securities (like bonds) may decrease, leading to lower returns for cash funds. This effect would be quickly offset by the higher ongoing interest rate that the fund would earn on its investments. This is arguably a small problem with cash funds – being that in an extreme market, the way they revalue might not always be logical or understood by some investors. For this reason, it's crucial to monitor changes in interest rates and consider their potential impact on your cash fund investments. 

The interest rate sensitivity of a cash fund is pretty low. By way of background, the interest rate sensitivity of an asset or portfolio is a function of its duration, and it is sort of mathematically simple. If you know the duration (say five years), then you know if the yield on the portfolio or security changes by a whole 1%, then the price of the security should change by roughly 5% (e.g. the capital movement for a 1% change in the yield is roughly the same as the duration - but expressed as percentage movement):
  • Five years duration equals a 5% change in value for a 1% movement in yields.
  • This means a 1-year duration equals a 1% change in value for a 1% movement in yields.
  • And a 0.25-year duration (which is what a lot of cash funds target) equals a 0.25% move in value for a 1% change in yields.

So if yields on the Mercer Macquarie Cash Fund jumped by 1% tonight from 5.66% to 6.66%, it would impact 0.25% on the capital value. But because it is generating roughly >0.50% per month in return, this would hardly be seen - as the unit price would recover in less than 14 days.

How often are cash fund returns paid out?

Typically the return of a cash fund compounds and accrues daily (meaning each day, the fund's price increases slightly). The manager may then elect to distribute this at any stage, so the frequency at which cash fund returns are paid out as distributions can vary depending on the fund. For example, some cash funds distribute returns on a monthly, quarterly, or annual basis, while others may reinvest returns automatically to compound the growth of the investment. Before choosing a fund, understand the distribution frequency and choose a fund that aligns with your income needs and preferences. The distribution policy of a cash fund does not change or impact the return that an investor receives (the exception to this is that a distribution may potentially bring forward the payment of tax by an investor to an earlier date).
Related Guides: