There’s been a recent surge in fintechs offering fixed-interest investments to retail investors. This is interesting because fixed interest has never been as popular as shares, whether held directly or through ETFs.
More access to fixed interest isn’t necessarily a bad thing. The issue is how these products are marketed, being pitched as alternatives to bank accounts or term deposits with better returns.
That framing is attractive, but it’s also misleading. Especially for retail investors who don’t fully grasp the risks tied to fixed interest compared to cash.
What Is Fixed Interest?
Fixed interest investments (or bonds) are loans. You lend to a government, bank, or company, and they pay interest and repay your capital. They’re more stable than shares, but not risk-free.
One appeal is pricing efficiency: you’re generally compensated in line with the risk. So, if something is offering a higher return, there’s almost always an additional risk attached.
The risks include:
- Interest rate risk: When rates rise, fixed-rate investment values fall, especially long-term ones.
- Credit risk: The borrower may default. Government bonds are low risk; corporate bonds, especially from lower-rated issuers, carry more.
- Liquidity risk: You might not get your money when you want it. Some fixed-interest funds and private credit options don’t allow same-day access – and may freeze withdrawals in times of stress.
Fixed interest investments fall on a risk spectrum:
- Low risk: Government bonds (e.g. Australian Government Bonds) offer low returns but high liquidity and safety.
- Medium risk: Investment-grade corporate bonds (e.g. issued by big banks or other large businesses) offer slightly higher returns for more risk.
- High risk: High-yield bonds, private credit, or peer-to-peer lending may offer 10%+, but with greater credit and liquidity risk.
In short: higher return = higher risk. Remember this when considering these higher return “alternatives” to bank accounts.
The Marketing
These companies avoid saying “bank account” outright, because if they did, regulators would step in.
Instead, they use phrases like “a place for your savings,” or other cash-related language that implies these are products to be used for your personal savings. The goal is to attract those frustrated with low bank interest, not necessarily those actively seeking fixed-income investments.
Against that perception, a 5-6% return looks appealing, up to 2% more than a high-interest savings account. But this becomes problematic when the risks are buried in the pages of a massive PDS that few investors read, let alone understand.
What Are You Actually Investing In
The company or app you’re using to invest isn’t the one managing your money, that role is outsourced. The platform simply adds a fee on top for itself.
As highlighted before; in order to offer returns above bank interest or government bonds, the investments must carry more risk.
Most of these platforms use managed funds that invest in corporate bonds – debt issued by companies. Companies are inherently riskier borrowers than governments, hence the higher yield of these products.
Riskiness of Individual Bonds
Credit ratings measure a borrower’s ability to repay. They range from D (default) to AAA (extremely safe, usually governments).
Anything rated below BBB is considered non-investment grade, or “junk.” These issuers may default if economic conditions deteriorate.
The fixed interest funds behind these platforms typically average around BBB or BBB+. Still investment-grade, but at the lower end. For context: Computershare Ltd and CSR Ltd currently have BBB ratings. These are large and stable businesses – but clearly riskier than the big banks.
Individual bond risk can be mitigated through diversification: while a single business might go bust, but very unlikely that hundreds will.
Leverage and Preventing Underperformance
Even with BBB-rated bonds, risk is manageable in a diversified portfolio. But low interest rates create a problem.
If the fund promises a 6% return, but its investments are only earning 5%, there’s a shortfall. This was common when rates were lower – e.g. government bonds at 3%, quality corporates at 5%.
To close the gap, many funds use leverage (as disclosed in the PDS). This is essentially borrowing to invest more and boost returns.
Leverage amplifies both gains and losses. If rates rise, bond values fall. That’s what happened in 2022, when some high-quality bond funds fell over 10%.
Return Fluctuations
Leverage only goes so far. It can’t override broader market trends-especially when yields fall or capital losses occur.
Some platforms claim to have “capital protection” or “downside safeguards.” That’s great while markets are stable and predictable, but have they been tested under a GFC-like scenario where previously stable businesses (including banks) went bankrupt?
In reality, the PDS gives away the extent of this capital guarantee: “Unit prices are not guaranteed, and returns may fluctuate significantly”. The PDS also says that any top-ups made to investors in the fund to meet the stated return target is at their own discretion – essentially, they get to choose whether to do it or not.
And yet, these same platforms offer online calculators projecting smooth growth for 10+ years based on the advertised return of today. This creates the illusion of predictability, which fixed income investing (via a managed fund) rarely offers over long periods. Even more absurd, a disclaimer admits the calculator doesn’t reflect the actual investment being offered. So, what’s the point then?
It’s also blatantly ignoring the history of their own product, since these platforms were instead targeting a 3% return as recent as 2022. These yields are never fixed, but the slick marketing conveniently glosses over this point.
Ultimately, returns will be dictated by the broader fixed interest market and will rise and fall with it. Advertising returns without making it abundantly clear that this is based upon the current fund in the current market can be confusing for retail investors looking for an alternative to bank accounts and term deposits. Again, this is made clear in the wording around the fund targeting a certain return, not guaranteeing it.
Fees and Underperformance
With appropriate diversification, the risk level of these products doesn’t seem to be extreme, however what stands out are the fees.
Both the platform and the underlying manager take a cut. Obviously, that means higher overall costs than going direct.
This is confirmed by the PDS documents for these products. Fees are often between 1-1.5% p.a. This is very high for a fixed income fund – an equivalent corporate bond ETF usually charges around 0.25% p.a.
Naturally, because of these fees, the performance of these investments has been lower compared to their low-cost alternatives. An Australian investment-grade corporate bond ETF returned nearly 10% in the year to 30 April 2025, about 4% more than many of these platforms.
So where does the extra return, after the fees, go to?
Often, excess return above the target is kept by the platform in a fund that can be used to top-up returns in the future. They capture the upside – whilst retaining the discretion to not add to the fund to top-up returns to the stated amount. The PDS makes that crystal clear, even to the extent that they retain the ability to limit redemptions in times of market turmoil.
Final Thoughts
The issue with these new tech-based platforms isn’t the investments themselves. In most cases, they appear to be standard investment-grade bond funds managed by professionals.
The real concern lies in how these products are marketed. Some platforms clearly present themselves as alternatives to traditional bank accounts.
Using today’s yield in their online calculators to indicate future returns glosses over the most important point in fixed income investing. Yields change constantly. This is evidenced by the fact that the same fund was returning almost half of today’s stated yield, just three years ago.
These platforms simply offer retail investors easy access to high-fee, investment-grade bond funds. Their only real point of differentiation seems to be the claim of stabilising unit prices during periods of market turmoil. But this isn’t new – many failed investments of the past, particularly structured products, made similar claims. The difference is that structured products often had these protections built in, whereas these funds retain full discretion not to apply them.
Ultimately, people must understand what they are investing in, the risks they are taking, and the fees they are paying. Whilst the marketing material blurs these distinctions, it’s critical to recognise that these products are fundamentally different from savings accounts in both risk and complexity.
Again, the clear lesson for investors is to read and understand the PDS before proceeding with any investment decision.
