Cash Funds vs Term Deposits: The Complete Investment Guide

Our guide compares the pros and cons of cash funds with term deposits, looking at tax advantages, fees, flexibility and returns to help you make the best choice for your savings.

Updated 11 December 2025

Summary

New Zealanders love term deposits - our best rates guide is one of MoneyHub's most popular resources.
However, there's another option gaining traction that has more flexibility and the potential to offer similar returns - cash funds.
With tens of billions of dollars sitting in term deposits, our comparison is designed to examine whether cash funds offer a better (or similar) deal for cash savings.

Our guide breaks down everything you need to know about cash funds versus term deposits, helping you make an informed decision about where to put your hard-earned money. We cover:

Understanding Your Options - Term Deposits and Cash Funds

Term Deposits: New Zealand's Traditional Choice

Term deposits have long been the go-to option for risk-averse savers of all ages. You deposit a lump sum with a bank for a fixed period, earning a predetermined interest rate.
Term deposits are straightforward, predictable, and backed by banks with strong credit ratings. Current rates can be found on our term deposit list - the interest rates on offer vary between banks and the time invested (90 days per year vs 3 years, etc).
Term deposits have a strong appeal - you know exactly what you'll get back and when you'll get it. There's no guesswork, no market volatility to worry about, and minimal risk of losing your money. For many New Zealanders, particularly those saving for specific goals or nearing retirement, this certainty is invaluable because there's no risk of losing money.

Cash Funds: The Flexible Alternative

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 is 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.

Cash Funds vs Term Deposits Compared

Our table below explains how cash funds and term deposits stack up across key features:

Feature	Term Deposits	Cash Funds
Current Returns	See latest rates	See latest returns
Access to Money	Locked until maturity (penalties for early withdrawal)	1-3 business days (no penalties)
Tax Treatment	RWT up to 39% (unless PIE term deposit)	PIE capped at 28%
Minimum Investment	$1,000-$10,000	As low as $1
Can Add Money	No	Yes, anytime
Management Fees	None	0.20-0.30% p.a.
Interest Rate Risk	Fixed for term (reinvestment risk at maturity)	Fluctuates with market
Diversification	Single bank exposure	Multiple securities & issuers
Break Fees	Yes, often significant	None
Best For	Fixed-term goals Certainty seekers	Emergency funds Regular savers Higher earners

The Tax Advantages offered by Cash Funds and PIE Term Deposits

Cash funds are structured as Portfolio Investment Entities (PIEs), meaning your tax rate is capped at 28%, regardless of your income level. For term deposits, you'll pay tax at your Resident Withholding Tax (RWT) rate, which can be as high as 39%, unless you invest in a PIE Term Deposit.

This is best explained with an example. If you earn over $180,000 annually, a non-PIE term deposit needs to offer 4.10% before tax to match a cash fund earning 3.47% after tax. For someone earning between $70,000 and $180,000, the non-PIE term deposit needs to offer 3.73% before tax to match that same cash fund return. This tax efficiency alone can make cash funds more attractive for many investors, especially higher earners.

Understanding the Fees Charged by Term Deposits and Cash Funds

Understanding the full cost of investing in term deposits or cash funds is essential to maximise your returns. We break down the fees associated with each option to help you understand what you're investing in:

Term Deposits:

Management Fees: None. Banks do not charge ongoing fees for term deposits, making them cost-effective if held to maturity. They make money from the difference between what they lend it out for (e.g. 6.29% p.a) and what they pay you (e.g. 3.70% p.a.).
Early Withdrawal Penalties: If you access your funds before the term ends, banks typically impose penalties, such as losing 10 to 100% of your accrued interest, depending on the institution and term length. For example, breaking a 1-year term deposit early might result in no interest paid or a reduced rate (e.g., 0.5% instead of 4%).
Other Costs: None

Cash Funds:

Management Fees: Typically range from 0.20-0.30% per year, deducted from your returns. For example, a $10,000 investment in a fund with a 0.25% fee incurs $25 annually.
Transaction Fees: Usually none - some cash funds have historically charged small fees for deposits or withdrawals, but this has largely stopped.
Performance Fees: Rare for cash funds, but some managers may charge additional fees if they outperform their benchmark. Wedge is one example of a cash fund that also has a performance fee built in.

Our View:

Term deposits are cheaper for those who can commit to the full term, as they avoid ongoing fees. However, early withdrawal penalties can make them costly if flexibility is needed.
Cash funds have higher ongoing costs due to management fees but offer greater liquidity and tax efficiency (via PIE structures), which can outweigh the fees for higher earners or those needing access to funds.
For a $10,000 investment, a term deposit at 4% with no fees yields $400 pre-tax, while a cash fund at 3.8% with a 0.25% fee yields $355 after fees but potentially less tax (28% PIE vs up to 39% RWT).

More information: Our Best Term Deposit Rates and Cash Funds Guide are helpful to compare net returns after fees and taxes.

Important Considerations to Make Before Choosing a Term Deposit or Cash Fund

Cash Funds are Flexible, Term Deposits are Not

With term deposits, early withdrawal typically means significant penalties – often resulting in the loss of a portion of your accrued interest.

Cash funds operate differently. You can typically access your money within one to three business days without penalties. This liquidity premium – the value of having ready access to your funds – is hard to quantify but invaluable when you need it. You can also add money to your investment anytime, which makes cash funds attractive to regular savers who want to build their emergency fund or save cash gradually while not missing out on interest.

Cash Funds Invest Widely, Term Deposits Lack Diversification

Term deposits offer the comfort of a single, fixed rate with one bank, backed by a deposit guarantee of up to $100,000 for qualifying financial institutions.

Cash funds spread risk across multiple investments and institutions. If one company in the portfolio faces challenges, it typically represents only a small portion of your total investment. However, this diversification does introduce some variability in returns. While term deposits guarantee a specific return, cash fund yields fluctuate with market conditions.

Important: The credit quality of cash fund investments is generally high, focusing on investment-grade securities from established companies and government entities. Fund managers actively monitor and adjust holdings to maintain appropriate risk levels, something you can't do with a locked-in term deposit.

Interest Rate Changes Affect Cash Funds and Term Deposits Differently

The Reserve Bank of New Zealand's Official Cash Rate decisions affect both options differently. With a term deposit, you're protected from rate decreases during your term but miss out on increases. When your term ends, you face reinvestment risk – the possibility that rates have fallen, and you'll have to accept lower returns on your next term deposit.

Cash funds adjust more dynamically. When rates rise, fund returns typically increase within weeks or months as the portfolio turns over. Conversely, when rates fall, returns decline. This responsiveness can work for or against you depending on the interest rate environment, but it ensures your returns remain competitive with current market conditions.

Professional Management Can Mean Higher Returns

Cash funds benefit from active professional management. Fund managers continuously analyse markets and interest swap rates, make interest rate predictions and seek the best risk-adjusted returns within their conservative mandate. They can access wholesale markets and investments unavailable to retail investors, potentially securing better rates than you could negotiate individually.

Cash fund managers also handle the complex task of managing maturity profiles, ensuring adequate liquidity while maximising yields. They navigate credit analysis, determining which corporate bonds offer appropriate risk-reward profiles. This expertise comes at a cost – typically around 0.20-0.30% annually in management fees – but can add value through improved returns and risk management.

Term deposits, by comparison, offer a fixed rate for the fixed term you invest - there's no risk of downside, but also no upside.

Our View: Choosing between cash funds and term deposits isn't necessarily an either-or decision. Many investors use both, leveraging the strengths of each for different purposes.

You can consider term deposits when you:

Have a specific sum you definitely won't need until a known date
Value absolute certainty over flexibility
Want to lock in current rates you believe will fall
Prefer the simplicity of a fixed rate and term
Are comfortable with single institution exposure

You can consider cash funds when you:

Need flexibility to access funds without penalties
Want to regularly add to your savings
Seek tax efficiency (especially if you're a higher earner)
Prefer professional management and diversification
Want returns that adjust with market conditions
Need a place for emergency funds or short-term savings

The Bottom Line

While term deposits offer unmatched certainty and simplicity, cash funds provide a compelling alternative for many situations. The combination of tax efficiency, flexibility, professional management, and diversification makes them particularly attractive for emergency funds, regular savers, and higher-income earners.
The right choice depends on your specific circumstances, risk tolerance, and financial goals. Many investors find that a combination of both serves them well – term deposits for known future expenses and cash funds for emergency reserves and ongoing savings.

MoneyHub Founder Christopher Walsh shares his views on combining Cash Funds and Term Deposits
I am aware many New Zealanders combine cash funds and term deposits to balance certainty, flexibility, and tax efficiency. You may want to consider using both options to create a portfolio that suits your financial needs, whether you’re saving for emergencies or planning for the future.

Here are some approaches you might explore:

Emergency Fund: You may want to consider keeping 3-6 months of living expenses in a cash fund for quick access. For example, placing $10,000 in a cash fund could provide liquidity for unexpected costs like car repairs or medical bills.
Short-Term Goals (1-3 Years): For expenses you expect soon, such as buying a car with cash or home repairs, you might consider laddered term deposits. For instance, you could explore putting $5,000 in a 1-year term deposit and another $5,000 in a 2-year term deposit to stagger access while securing fixed rates.
Retirement Income: If you’re retired or nearing retirement, you may want to consider splitting your savings to balance security and flexibility. For example, with $100,000, you might explore allocating 60% ($60,000) to term deposits for predictable income and 40% ($40,000) to a cash fund for emergencies or tax-efficient returns.
Regular Savings: To build wealth gradually without locking in funds, you might consider adding to a cash fund monthly.

Christopher Walsh
MoneyHub Founder

How to Choose a Cash Fund Manager

Selecting the right cash fund manager is crucial to ensure you get the best return from a manager you trust to align with your financial goals and risk tolerance. Before making any investment, we suggest you consider the following:

Track Record and Performance: Review the fund manager's historical performance, focusing on after-fee returns over 1, 3, and 5 years. Providers like Milford Asset Management, Kernel and MAS publish performance data on their websites, along with fund updates, to explain how the fund has performed.
Management Fees: Look for competitive fees, typically between 0.20-0.30% annually. Lower fees can significantly boost your long-term returns. Check the Product Disclosure Statement (PDS) for any additional costs, such as transaction or platform fees.
Investment Philosophy and Holdings: Ensure the fund invests in high-quality, investment-grade securities (e.g., government bonds, short-term corporate debt). Reputable managers like Milford, MAS and Kernel disclose their holdings and credit quality standards, reducing the risk of defaults.
Accessibility and Minimum Investment: Some providers, like Kernel, allow investments as low as $1, making them ideal for beginners. Others, like Milford, may require $1,000 or more.
Reputation and Stability: Choose established fund managers with strong reputations and independent custodians (e.g., major banks) to hold your assets. This protects your investment if the manager faces financial difficulties. Providers like Milford, MAS, and Kernel are well-regarded in New Zealand.
Transparency and Support: Opt for managers that provide clear, regular updates on performance, fees, and holdings.

Know This: Platforms like InvestNow allow you to compare multiple cash funds from different managers in one place, simplifying your decision. Always read the PDS to understand the fund's objectives, risks, and costs before investing.

Frequently Asked Questions

Can I lose money in a cash fund?

It's unlikely, but it depends on the investment mix. While cash funds are considered low-risk investments, they can experience small, temporary negative returns - typically less than 0.5% - during periods of rapidly rising interest rates. This happens if the cash fund invests in bonds and the value of existing bonds in the fund decreases when new bonds offer higher rates.

However, these losses are usually recovered quickly as the fund reinvests at higher rates. In contrast, term deposits guarantee your capital but lock you into potentially lower rates.

Which banks and providers offer the best cash funds and best term deposit rates in New Zealand?

Our guide to cash funds outlines leading options, which include fund managers like Milford Asset Management, MAS, Kernel and InvestNow's options, with yields typically ranging from 3.00% to 4.00% after fees.

For comparison, you can check our continuously updated Term Deposit Rates guide and PIE Term Deposits if you're a higher tax payer. Please remember that cash fund rates change daily with market conditions, while term deposit rates are fixed once you invest.

How quickly can I really get my money out of a cash fund?

Most cash funds process withdrawal requests within one business day, with funds appearing in your bank account within 1-3 business days total. Some providers like Kernel offer same-day processing if you request before their cut-off time (usually 2pm). This compares to term deposits, where early withdrawal can take 1-3 days, and an interest penalty is applied.

Are notice saver accounts better than cash funds?

Notice saver accounts, such as those offered by Kiwibank (like their 30-day and 90-day options), offer a middle ground between term deposits and cash funds. They typically provide higher rates than on-call savings with more flexibility than term deposits. However, they can lack the tax advantages of PIE cash funds and the instant liquidity. They're worth considering if you can predict your cash needs 30-90 days in advance.

What happens to my cash fund investment if the fund manager goes bankrupt?

This is unlikely given the low risk of cash funds when you invest with trusted fund managers offering cash funds. However, in every situation, your money in a cash fund is held separately from the fund manager's own assets by an independent custodian (usually a major bank).

If the fund manager fails, your investments remain safe and will be transferred to a new manager. This is different from term deposits, where your money is a direct loan to the bank and covered by the deposit guarantee scheme up to $100,000.

How do I calculate whether a cash fund or term deposit gives better after-tax returns?

There is a simple formula:

For standard (non-PIE) term deposits, multiply the interest rate by (1 - your tax rate). For example, 4% × (1 - 0.33) = 2.68% for someone on a 33% marginal tax rate.
For PIE cash funds, multiply the rate by (1 - 0.28) maximum. So a 3.8% cash fund yields 2.74% after tax - beating the term deposit despite the lower headline rate.

Our PIR Tax Guide explains how to confirm your tax rate.

What's the minimum investment for cash funds vs term deposits?

Cash funds typically have much lower minimums - often just $1 with providers like Kernel or InvestNow. Term deposits usually require a minimum of $1,000-$10,000, depending on the bank and term length. This makes cash funds more accessible for beginning investors or those building emergency funds gradually through regular contributions.

What is a Portfolio Investment Entity (PIE)?

A PIE is a tax-efficient investment structure in New Zealand where the maximum tax rate on returns is capped at 28%, compared to up to 39% for non-PIE investments like standard term deposits. This benefits higher earners ($70,000+ annually). See our PIR Tax Guide for details.

How do I start investing in a cash fund?

1. Choose a provider (e.g., Milford, MAS, Kernel, or InvestNow).
2. Open an account online (most platforms require ID and bank details).
3. Deposit funds (as little as $1 for some funds).
4. Select a cash fund that matches your goals. Our guide to cash funds is a helpful starting point.

Related Resources:

Best Cash Funds
Best Term Deposits
Best PIE Term Deposits
Making Your Investments Tax Efficient