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New spin on popular investment option

CASH management trusts have long been a popular option for savers and investors, but a new variant of the traditional product is attracting increased support.

The new electronic cash management accounts, such as ING Direct’s Savings Maximiser, offer a higher interest rate than traditional cash management trusts.

They also currently offer higher returns than term deposits, without having to lock-in the money for a fixed period.

The trade-off is that investors forgo some of the flexibility of traditional cash management trusts.

The emergence of the new style of account was reflected in Personal Finance magazine’s latest annual awards, which included a new product category titled ‘cash management accounts – electronic’.

These accounts are linked to a day-to-day transaction account, either with the same bank or another institution, and the electronic link allows individuals to quickly and easily switch cash between the two accounts.

Surplus cash can be transferred, via Internet or telephone banking, to the electronic cash management account and it immediately starts earning money market interest rates, currently about 5.25 per cent per annum.

An important feature is that this rate is paid on the full balance, in contrast to many traditional cash management trusts, which have a tiered structure.

This means that an investor who places, say $120,000, in a traditional cash management account could earn:

p zero interest on the first $5,000;

p about 0.5 per cent on the amount between $5000 and $20,000;

p about 2.7 per cent on the amount between $20,000 and $100,000; and

p the top rate, currently about 4.2 per cent, only on the final $20,000.

ING Direct pioneered electronic cash management accounts in Australia and other banks to enter the fray include St George, through dragondirect, and HSBC.

As well as a high interest rate, other features of these accounts include no bank fees, no minimum balance requirement, daily calc-ulation of interest, and 24 hour, seven-day access to the account.

On the downside, these accounts have limited transactional capability compared with a traditional cash management account.

In the latter case, account holders have card access to their account (via ATMs and EFTPOS) and can have a cheque book.

In some cases, they also have to pay account keeping and transaction-based fees if their account balance falls below a stated minimum, usually $5000.

Apart from cash management accounts, another option for investors looking to maximise earnings on their cash is a term deposit.

The interest rate on term deposits increases with the size and duration of the deposit, all of which are fixed at the outset.

This provides certainty to the investor, in contrast to cash management accounts where the interest rate fluctuates with trends in the professional money market.

There is substantial variety in the term deposit rates offered by banks and other institutions, so it pays to shop around.

Investors making a $5000 term deposit for four months currently would earn between 3.0 per cent a year and 3.8 per cent a year.

If they increase the size of their deposit to $20,000 and keep the same term, the rate jumps to between 4.0 per cent and 4.5 per cent/year.

For a 12-month term deposit, the top rate is currently about 5.0 per cent /year for amounts of $20,000 or more. Slightly higher rates are available to investors prepared to lock-in their money for even longer periods.

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