Investors looking for fixed deposits paying high interest rates are finding that the rates on offer at the banks are declining. The RBA’s two rate cuts to date have already brought deposit rates down.

More cuts are likely. The latest inflation reading was lower than expected. The Consumer Price Index rose 2.4 per cent in the year to the end of March and 2.1 per cent in the year to May. This decline means the RBA can reduce interest rates.

Investors may be tempted to look for higher rates. There are a range of options, but some carry risks.

There are managed funds investing in income securities. They invest in government bonds, bank securities and loans to major companies. They are run by managers like Perpetual and BT and earn better interest rates than bank deposits with good security, around six per cent currently.

There are also many private credit funds. They are funds that lend the money invested in them to private borrowers. Who they lend to affects both the interest rates they earn and the likelihood of repayment.

Some funds are run conservatively and offer good transparency. They lend only with first mortgage security and only on lower loan to value ratios, perhaps sixty per cent maximum. They lend to borrowers with strong credit ratings.

La Trobe Financial is one company with a clear history of good management and reliable payments without default, for more than fifty years. 

Some private credit funds offer eight or ten per cent per annum, or even more. The manager will be adding a margin so the loans are costing the borrowers ten or twelve per cent, or higher. Who pays those rates? Mostly, borrowers who can’t borrow more cheaply from another lender such as a bank.

Some private credit funds are quite opaque. They could be lending to property developers on high loan to value ratios to fund high risk developments. They could be lending to highly geared small companies.

Estate Mortgage was one such fund that failed in the 1990’s. LM or Law Mortgages was another that collapsed in the early 2000’s. It suffered big losses when a Gold Coast property development boom crashed. Investors received little of their money back.

Recently the Shield Master Fund was hit by heavy losses. Investors are expected to get back around fifty cents in the dollar. ASIC is currently investigating several others. Obviously these private credit funds are not covered by the government guarantee on bank deposits up to $250,000.

There are income funds that pay more than bank deposits with good security. They offer perhaps six or seven per cent, but anything higher carries risk.