JOHN COLLETT: Balancing risk against returns on your investments

IT'S one of the most frequently asked questions: how can I get a decent return without taking on risk?

A cash rate at record lows leaves those living off their savings in a tight spot.

Most term deposits are paying interest of less than 3 per cent, which is only a tad more than inflation - the biggest enemy of those living on their savings.

Interest rates will return to normal levels, but with economic growth still weak they could remain low for some time.

Anyone seeking a higher return has to take on some risk. But it is very hard for someone who has always been very conservative with their money to start over with a new investment strategy.

But the shares of the big banks, for example, can be bought on yields, after franking credits, of more than 7 per cent.

Then there are managed funds. Some managed funds invest only in Australian shares and others invest only in global shares.

Some have what is called a "balanced" strategy, where the money is invested in the major asset classes in Australian and overseas.

These are unlisted "unit trusts" where the fund manager, for a fee, decides how much of the money should be invested in each asset class and selects the best individual investments in each market.

Some balanced managed funds have only 30 per cent in so-called "growth" investments, such as shares and property, with the remainder in cash and fixed interest.

Over the medium term they should be able to produce more income than a term deposit. They should also be able to grow the capital to protect against inflation.

The capital value may go down, but the downside risk should be limited if only 30 per cent of the money is in growth assets.

If the investor can live off the investment income and does not need to draw-down the capital, is that such a big deal?

There is another way of looking at this. A full age pensioner is really receiving an income for life, which has been adjusted for inflation and guaranteed by the government.

That should leave them with more tolerance for taking on a bit more risk with their savings if it will make life a little easier.

Financial planners often talk about a "bucket strategy". This is where the growth investments are earmarked as a longer-term investment.

Some of the money could be in high-yielding Australian shares, for example, with the intention of not touching the money for a couple of years. Another portion of savings would be invested in cash and fixed-interest investments that pay a steady income.

Another point to bear in mind is that the highest-paying online saver accounts are paying about the same as term deposits, or a little more, without the money having to be locked away.

The higher interest rates for online saver accounts includes a "bonus" interest rate, that typically last for four months for new customers before reverting to the lower "base" interest rate.

And like term deposits, online savers are covered by the government guarantee for the first $250,000.