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As OCR falls, are Managed Funds attractive alternatives to term deposits?
With New Zealand’s Official Cash Rate (OCR) falling by 0.50% to 2.5%, and many economists predicting that it will continue to fall, term deposit holders may soon find their returns slipping further. Lower interest rates mean less income for savers, prompting many to ask whether their money could be working harder elsewhere.
One alternative worth considering is a managed fund, which offers the potential for stronger long-term growth and broader diversification than a traditional term deposit.
According to Morningstar data to the end of August 2025, for the New Zealand Bonds for three-year returns, a defensive category fund could deliver a 6.0% - 6.50% annualised return for investors
A defensive category fund has a relatively low risk indicator score, of 3 [out of 7]. This makes it appealing to some conservative investors, as it provides a familiar level of stability, but with the added benefit of professional management, diversification, and the potential to outpace inflation over time.
What are managed funds?
When you research the topic of financial planning in New Zealand, managed funds are one of the key investments that are recommended. But what exactly are managed funds?
Managed funds are professionally run investment funds where your money is pooled with other investors. A portfolio manager then invests that pool across a mix of assets — like shares, bonds, and cash — depending on the fund’s strategy. You own ‘units’ in the fund, and the value of those units goes up or down based on how the fund’s investments perform.
How managed funds work?
When you invest in a managed fund in New Zealand, you purchase ‘units’ that represent a portion of the fund's total value. The unit price on any specific day indicates your share of the fund’s worth – how much your investment is currently worth.
Your investment is combined with those of other investors in the fund and managed by our team of professional fund managers who invest in both local and international markets.
The value of these units fluctuates depending on the performance of the financial assets within the fund. This value can go up or down. Your investment return is the difference in unit price when you first invest compared to when you withdraw.
Key differences between managed funds and term deposits
For term deposit:
- Savers know exactly what interest rate they will earn for the agreed period
- It generally carries lower volatility but offer little flexibility
For managed funds:
- Managed fund returns are not guaranteed and can fluctuate in value depending on market performance.
- Managed fund returns have the potential to be negative as well as positive. But over the long term they generally have the potential to outpace inflation and deliver stronger growth.
- Managed funds can provide easier access to your money, investors can withdraw their money at any time, without lock-in periods or withdrawal fees.
- With active management, professional oversight, and diversification in managed funds, investors can benefit from opportunities not available in traditional deposits.
- As managed funds are PIE (Portfolio Investment Entities) funds, an investor can benefit through a capped tax rate of 28% versus income tax rates of up to 39% on interest from term deposits.
Managed funds come in many forms, and are not all directly comparable to term deposits due to their varying levels of equity exposure and risk, investors should seek expert guidance before investing — especially if they are moving from a term deposit — to ensure they fully understand the risks.
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Patrick Wang
