Perhaps surprisingly, many people who invest in KiwiSaver don’t know what they’re investing in. And the thing is, to achieve your savings goals, it’s really important that you choose the right fund for your timeframe.
First, understand where your KiwiSaver is currently invested
KiwiSaver was set up by the New Zealand Government in 2007 to help Kiwis save for retirement.
Many Kiwis are unaware who their fund provider is, or what funds they are invested in. To ensure your KiwiSaver account is invested to suit your age, goals and risk profile, it's important to find this out - and to understand you DO have a choice of both fund provider, as well as the selection of funds you're able to invest in.
Not sure where or how your KiwiSaver money is invested? Go to your MyIR account (Inland Revenue) to find out.
Common categories for your investment
There are five main fund categories that most KiwiSaver providers offer:
- Cash (low risk)
- Conservative (low – medium risk)
- Balanced (medium risk)
- Growth (medium – high risk)
- Aggressive (high risk).
It’s important to consider your future plans and how much risk you are comfortable with when you are choosing which investment category is best for you.
Understanding risk & return
The funds listed above vary in risk because of the types of assets they invest in. A fund’s risk level is determined by the percentage of growth assets (such as shares and property) it invests in. Lower-risk funds, such as Cash and Conservative, invest mainly in income assets (such as term deposits and bonds) and have less exposure to equities.
Here is an estimate of the percentage of growth assets in the five types of funds:
- Cash (0 – 9%)
- Conservative (10 – 34%)
- Balanced (35 – 62%)
- Growth (63 – 89%)
- Aggressive (90 –100%)
The reason why you may opt for a riskier fund, with largely growth assets, is because over time it has the potential for higher returns. To learn more about investment risk, read this post about the risks of investing and how to manage them.
How do you intend to use your KiwiSaver investment?
When deciding on KiwiSaver funds that best suits your needs, ask yourself the following questions:
- What's your goal for your KiwiSaver investment - is it for your retirement or do want to use it for your first home (or both)?
- What's your timeframe? How soon will you need the money?
Remember, KiwiSaver is primarily a retirement savings scheme. Savings are generally locked in until the qualification age for New Zealand Superannuation, which is currently 65. You may be able to apply to withdraw your funds earlier in limited circumstance, such as purchasing your first home.
Choosing a fund: Two scenarios
- Bob and Angela are both in their early 40s. They have already purchased a home so they intend to use their KiwiSaver savings for their retirement.
- Tony and Kate, on the other hand, are in their mid-20s and saving for their first home. They are planning to purchase a home using their KiwiSaver savings in the next couple of years.
Each couple has a different goal and timeframe.
Bob and Angela have plenty of time before retirement. They have 20-plus years which may influence the fund they choose. Their longer time frame means they can consider opting for a higher-risk fund. Bob and Angela understand that growth assets can fluctuate in value but they also know that if their fund dips in value, they have plenty of time to recover. For this reason, they may be comfortable with higher risk for the chance of a higher return.
How about Tony and Kate? They too, know that growth funds generally yield higher returns over time. However, they are planning to use their investment for a deposit on their first home in a couple of years. They need to have more certainty around the value of their investment when they plan to use it towards their house purchase and would be more sensitive to fluctuations in value. So, in this case Tony and Kate may be more comfortable choosing a less risky fund and accept potentially lower investment returns. After having purchased their first home, they may well then decide to invest their KiwiSaver savings in a fund with potentially higher returns.
Regardless of your circumstances, risk tolerance is a personal thing. Many factors come into play, like timeframe, your age, your upbringing, number of dependents and the gap between your income and expenses.
Luckily, we've developed a handy tool to help you assess the impact of different fund choices your KiwiSaver investment over time.
Give it a go!
See how your KiwiSaver investment could change over time by trying different funds using our handy projection tool.
Nikko Asset Management New Zealand Limited (Company No. 606057, FSP22562) is the licensed Investment Manager of Nikko AM NZ Investment Scheme, Nikko AM NZ Wholesale Investment Scheme and the Nikko AM KiwiSaver Scheme. This material has been prepared without taking into account a potential investor’s objectives, financial situation or needs and is not intended to constitute personal financial advice, and must not be relied on as such. The Product Disclosure Statements are available on our website: https://www.nikkoam.co.nz./invest/retail.
