With interest rates increasing materially over the last 12-18 months as central banks fight inflation, term deposits have returned to the spotlight.
But have they been a good place to invest your money?
Let's take a look and see what $5,000 invested in a term deposit a year ago is worth now in comparison to an investment in ASX 200 shares.
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Term deposits
For investors with a low risk tolerance, term deposits can be a great option.
That's because they offer investors a certain outcome for their money, which is not something that you can say about ASX 200 shares.
One year ago, Commonwealth Bank of Australia (ASX: CBA) was offering income investors a 3.85% interest rate on a 12-month term deposit. This means that if you had invested $5,000, you would have grown your money to $5,192.50 today.
However, it is important to note that the most recent Australian quarterly inflation reading revealed that the consumer price index rose 4.1% on a 12-month basis from December 2022 to December 2023.
And while inflation has been easing further since then and a decline is expected to be reported for the current quarter, it seems quite apparent that most of the gains from the term deposit will be wiped out by inflation.
So, although this is certainly a better outcome than doing nothing, it isn't the most optimal use of your funds.
ASX 200 shares
It turns out that investing in ASX 200 shares a year ago would have been a very good move.
During this time, the ASX 200 index has risen by a very attractive 10.6%.
If you had been able to match the market return with a balanced portfolio or exchange traded fund (ETF), this would have turned a $5,000 investment into $5,530.
But that's not all. The local share market is a big payer of dividends, which means that you would have also received a couple of pay checks during the year.
And it turns out that those pay checks would have generated more income than you received from term deposits. The ASX 200 index has a trailing dividend yield of approximately 4.15%, which would have generated a further return of $207.50.
Overall, this would mean your $5,000 investment is worth a total of $5,737.50 today if you reinvested your dividends.
