Are term deposits worth it? Why a managed fund may be a better option

When Kiwis have spare cash, many put it straight into a term deposit at the bank. It’s what we’ve long been taught to do – save it safely in the bank and let it sit. It feels safe, simple, and familiar – like parking your money in a garage. But with the Official Cash Rate (OCR) expected to keep falling, term deposit returns are shrinking, and your money might just be sitting still instead of moving forward.

Managed funds are an alternative option worth considering, as they can offer the potential for higher returns and more flexibility than term deposits.

Managed funds are designed to be accessible and make investing easy. The key word is “managed” – an investment expert does the hard work for you. You simply choose how much you want to invest and when you want to withdraw your money – there's no fees to withdraw or restrictive timelines.

With a managed fund, your money isn’t just parked – it’s out on the road, being driven by an experienced professional with the goal of getting you further, faster, and with stronger results over time.

Compare managed fund and term deposits

Managed funds

When you invest in a Generate Managed Fund, your money is combined with other investors’ money and actively invested by our professional fund managers across a mix of local and global markets.

What makes managed funds appealing:

• Expert oversight: You don’t need to choose individual investments – our expert fund managers do the work for you.

• Growth potential: Although returns can fluctuate and aren’t guaranteed, managed funds often offer higher long-term returns, especially in growth-focused funds.

• Flexibility: You can take money out when you need to, with minimum lump-sum withdrawals of $500 or regular payments of at least $100.

• Diversification: Depending on which fund you choose, investments can be spread across multiple asset types, which helps reduce the impact if one area underperforms. (Note the Fixed Interest Fund is not diversified across asset classes, but is invested in a number of bonds/ fixed interest assets).

• Potentially lower tax: Managed Funds are PIR investments, and this may mean you pay a lower tax rate, especially if your income is higher.

Things to keep in mind with managed funds:

Managed funds do involve risk – their value can rise and fall with global events, economic conditions, or market sentiment. You need to choose the best option for your timeframe and risk profile. Aggressive funds are best suited for long-term investors who are comfortable with short-term ups and downs.

For those with a shorter timeframe, a Generate’s CashPlus, Fixed Interest or Conservative Managed Fund might be more appropriate. You will also be charged an annual fee, which is deducted from your returns. You can find out more information on fees here.

Talking to a Generate Adviser is the best way to check if a fund matches your goals and risk appetite.

Term Deposits

A term deposit takes a simpler, more conservative approach. You place a fixed amount of money with a bank or financial institution for a set period, and in return, you earn a guaranteed interest rate.

Why people choose term deposits:

• Security & Predictability: Returns are locked in upfront, so you know the outcome.

• Ease: They’re straightforward to set up – you simply pick the term and amount.

• Resident withholding tax: May result in a lower tax burden (higher net returns), if your income is lower.

• No management fees

Points to consider with term deposits:

Term deposits don’t usually allow early withdrawals without penalty, so if you suddenly need your money, you may lose out on your interest returns. Additionally, you won’t benefit if interest rates go up after you’ve locked in the rate (on the flip side, you won’t be affected if they go down). Term deposits also tend to offer lower returns than managed funds, reflecting their lower risk.

Compare managed fund and term deposit returns

Let’s compare investing $5000 over five years. A term deposit can currently earn about 3.9% for this time period. After five years, that term deposit would be worth $6,050 – a gain of $1,050.

Let’s look at how investing that same money in a managed fund might compare.

While returns are not fixed like a term deposit and can’t be guaranteed, high-performing aggressive funds like Generate’s have typically averaged five-year annual returns of around 10% or higher.

For a five-year investment, an aggressive managed fund, like the Generate Focused Growth Managed Fund, could have been worth $8,070, with a gain of $3,070 – nearly triple the returns!

Note, for the purposes of this comparison, tax and fees have not been calculated.

In this situation, a managed fund could have performed better, and would have been just as easy to arrange.

Are managed funds always higher-risk, long-term investments?

In the example above, we’re looking at a five-year timeframe where the market has a bit more time to smooth out any bumps from volatility. But what if you only want a short-term investment, with lower volatility?

The conventional wisdom used to be that if you want low-risk returns over a shorter timeframe, a term deposit is your best bet. But this assumption has been challenged lately with a new suite of more conservative managed funds that focus on income assets and aim to provide stable returns over the short term.

Generate launched two new funds that fit this profile in April 2025.

Generate Fixed Interest Managed Fund – an actively managed and primarily invested in high-quality bonds, designed to deliver steadier, more predictable returns than shares.

Generate CashPlus Managed Fund – a low-risk fund holding only cash and cash equivalents (such as term deposits), designed for investors seeking capital stability.

These funds carry relatively low risk indicator scores, offering a familiar sense of stability — but with the added benefits of professional management, the potential to outpace inflation over time, and the flexibility to withdraw your money at any time.

What are the tax rates for managed funds compared to term deposits?

Tax rates are another important consideration. Different rates apply for a managed fund versus a term deposit. These depend on your income and are a key factor when choosing between these two investments, as the tax rate will cut into your returns.

Managed funds use PIR. PIR gives you fixed tax rates of 10.5%, 17.5%, or 28% (or 0% in special cases) depending on your income history.

Term deposits use resident withholding tax (RWT). This has steeper top rates, going as high as 39%, and is more granular across income brackets. The rates are 10.5%, 17.5%, 30%, 33% and 39%.

In many cases, managed funds taxed via PIR can result in lower tax drag especially for higher-income earners, because the maximum PIR of 28% is lower than the top RWT bracket of 39%.

How do fees differ between managed funds and term deposits?

Generate charges a management fee for each of its managed funds, which are calculated as a percentage of your balance. To see our current managed fund fees click here.

Term deposits don’t come with management fees (as they’re not actively managed), although you may be charged a penalty fee for early withdrawal.

What’s the difference in risk between a term deposit and a managed fund?

When it comes to risk, term deposits have zero volatility – you know exactly what interest rate you’ll earn, and your principal is safe unless the bank itself were to fail (which is highly unlikely in New Zealand’s regulated banking system). In other words, your return is fixed and predictable, provided you keep the money in for the full term.

Managed funds, however, are different. Their value depends on the performance of the assets they invest in — such as shares, bonds, or a mix of both. This means your balance can fluctuate: it may go up, but it can also go down, particularly in the short term. Unlike a term deposit, returns are not guaranteed, and the outcome is linked to how markets perform over time. Even conservative funds that focus on bonds can still see some ups and downs, though generally less than funds that hold shares.

This is an important difference for anyone considering a move from term deposits. Term deposits provide certainty, while managed funds involve more risk — but with that comes the potential for higher returns, especially over the long run. Because managed funds come in many forms and carry varying levels of equity exposure and risk, it’s essential that investors seek expert guidance before investing, so they understand exactly what they are committing to and what trade-offs are involved.

Summary: What are the pros and cons of managed funds vs term deposits?

Every circumstance is different, so it’s helpful to have an overview of how managed funds and term deposits work. It’s also a good idea to get professional financial advice, so you can understand what’s right for your situation.

The option that’s right for you really comes down to your personal situation.

A Generate Managed Fund might suit you if:

• You want professional management.

• You’re investing for the long term.

• Higher potential returns matter to you.

• You like having access to your money when needed.

• You have a higher income bracket, so your PIR would be lower than your RWT.

A term deposit could be a better fit if:

• You prefer certainty and fixed returns.

• You want a very low-risk, set-and-forget option.

Both managed funds and term deposits have their place, and the best choice depends on your goals, time horizon, and tolerance for risk.

What's next

Want to know more? Click here to see our suite of Generate Managed Funds.