It is not often you can say the hottest investment in the market is a term deposit but there it is. Banks and other financial institutions say that money is pouring into term deposits and high-yield at-call accounts at the fastest rate they have seen in years.

The Commonwealth Bank's executive general manager of retail products, Michael Cant, says the bank's deposit balances were up 17 per cent during the 2007-08 financial year, compared with the average long-term growth in deposits of 8 to 10 per cent a year.

Cant says the most popular options are three-, six- and 12-month term deposits. Few investors opt for terms that are longer than a year, although the bank offers term-deposit rates up to five years.

The cause of this trend is clear: investors are avoiding a depressed sharemarket and a flat investment property market. But why the narrow focus on term deposits and high-yield savings accounts?

Are investors just taking the easy option without doing a bit of homework on risk and return? Would the very risk-averse be better off with a safer option, such as a government bond? Should others take a bit more risk and get a higher rate on a debenture or a hybrid?

Investors also need to think about the terms they are investing for. Bankers say the money is going into high-yield cash accounts and term deposits maturing in 12 months or less. At the moment economists are debating whether interest rates have peaked or will do so by the end of the year.

Among the big banks, Westpac, National Australia Bank and St George economists all say Reserve Bank rates will not go any higher.

The Commonwealth Bank economist reckons there is one more increase due in September and that will be it, while ANZ's economist, the most bearish of the lot, expects two more increases this year before official rates peak at 7.75 per cent in December.

The consensus is that the period of monetary policy tightening will end this year. Investors must think about locking in today's high rates for the longer term.

Term deposits

When it comes to term deposits, the rates speak for themselves. Investors can earn more than 8 per cent with very little risk. Most of the issuers are banks, building societies and credit unions with high-quality credit ratings.

As the table shows, the most competitive rates for terms up to 12 months are offered by Elders Rural Bank, BankWest, Suncorp and Bank of Queensland. Also in the mix are some smaller institutions - Capricornia Credit Union, MyState Financial, Railways Credit Union and Home Building Society.

Cant says that about a year ago the Commonwealth decided to discontinue the debentures issued by its finance company subsidiary CBFC and extended its term deposit range. It offers term deposits out to five years but Cant says there is little demand for anything longer than 12 months. "We have a good rate for two years at 8.3 per cent but there is very little take-up."

Investors who accept the view that rates are at or approaching their peak might want to take another look at those longer terms. They would provide a way of locking in the present high rates.

Online saver accounts

The high-yield online savings account market has been one of the most competitive areas of retail banking over the past few years. Groups such as ING Direct, Rabobank and BankWest saw an opportunity to take deposits away from the big banks by offering high rates and efficient online services. That competition has intensified over the past year as all banks have tried to increase the flow of retail deposits into their balance sheets to offset the high cost of wholesale funds.

This is all good news for investors. The table shows that there are five institutions offering 8 per cent or more at call. Those rates are all special promotions, the rate reverting to a level about 7-7.5 per cent at the end of the promotional period.

BankWest's head of retail mortgages and savings, Paul Vivian, says his group has had very strong flows into its online savings products, TeleNet Saver, and its term deposits. He says the balance is swinging away from savings accounts to term deposits. "A lot of people believe rates are getting to the top of the cycle, so they are putting the money into something more long-term to lock those rates in."

Debentures

Debentures are debt instruments usually issued by finance companies. In recent times they have gained a bad name because of the debentures issued by groups such as Bridgecorp, Australian Capital Reserve and Fincorp.

However, the debenture market is also a source of funding for groups such as Esanda, a subsidiary of ANZ Bank. Debenture issuers often pay higher interest than the rates on bank term deposits because finance companies usually have lower credit ratings than banks and must compensate investors for the extra risk they are taking. Companies can also issue debentures.

The Australian Securities and Investments Commission has published a guide to investing in debentures. It warns that debenture issuers may or may not have a credit rating; if they do not, investors do not have a clear picture of the risks they are taking.

The commission says: "An unrated investment is not necessarily high risk but it does mean that you will have to use other means to evaluate the issuer's ability to repay your interest and capital."

ASIC also says that debentures may be listed or unlisted. Listing a security gives investors liquidity, allowing them to get their money out at any time. If the security is unlisted, the investors usually must wait until the debenture matures.

The commission recommends investors look for the following items in the prospectus: the loan policy of the finance company and if it is sufficiently diversified; if the finance company provides loans to related parties - companies that are closely linked to the finance company; and, if the debenture issuer is a property finance company, how the properties it is funding have been valued.

It says that in the past, debenture issuers have attracted funds by offering very high returns but "high returns mean high risk". One rule of thumb used by its investigators over the years is that investors should be cautious if the rate is more than 2 per cent higher than a term-deposit rate for the same term.

Because banks have been keen to raise retail deposits and are pricing their savings accounts and term deposits aggressively, there is not much extra yield in the present range of debentures on issue.

The InfoChoice website says Provident Capital, an unrated issuer, offers 9.2 per cent for a 12-month debenture and GR Finance, also unrated, offers 10 per cent. Investors who believe rates will start to fall and who are prepared to invest long-term can lock in 9.4 per cent for five years with AuSec, also unrated.

Bonds

Government and semi-government debt instruments are an almost forgotten investment. During the Howard years, the Federal Government paid off most of its debt and kept only a small amount on issue, so that the Commonwealth bond market would remain open. Many retail investors got the impression that the market had stopped operating.

A visit to the website of a specialist fixed-interest broker, such as Lewis Securities, shows that not only does Commonwealth paper continue to be traded but so does a wide range of state-government paper.

The principal of Lewis Securities, Tony Lewis, says private investors can buy government and semi-government bonds through a broker in $20,000 parcels. He says investors who are averse to risk should consider them because all issuers have very high credit ratings - AAA or AA. The yields aren't too bad, either. Lewis says there are plenty of options about 6.9 or 7 per cent. Another interesting feature of this market is that governments issue long-term bonds. An investor who wanted to lock in a rate for the next 10 or 15 years (this can be used to match a known liability) can find securities maturing in 2019, 2021 and 2023.

Superannuation

Something new in the high-yield product mix is at-call accounts sitting inside super funds. Since July 2006, people turning 55 have been eligible to receive a pension on all or part of their super benefits. This pension can be used as an income supplement and the recipient can continue working and contributing to super.

This change has made super more flexible and has created opportunities for banks to put savings and transaction accounts into super funds. ANZ and Westpac have already designed cash options for super accounts that have transaction functions. There are sure to be more.

For anyone older than 60, the age at which super benefits become tax-free, these accounts can be a highly effective savings vehicle.

ANZ has announced a deal with Russell Investment Group to add its Prime Cash Management Account to a Russell pension fund. The cash management account option is designed to provide fund members with easy access to their pension drawdowns; it comes with an ATM access card and can be linked to an ANZ transaction account. Withdrawals can be made by ATM, internet transfer, Bpay, direct debit, Eftpos and at branches. The rate is 6.25 per cent at-call - tax free for anyone over 60 (however, because the account is an investment option in the pension fund, investors must pay Russell's administration fee).

Westpac has done something similar with its online super product, BT Super for Life. The fund has a cash option paying 7.4 per cent. The interest is tax-free to anyone over 60 and fund members receiving pensions have the funds at call. The head of BT Super for Life, Melanie Evans, says: "People no longer need to think about banking and super in isolation."

Hybrids

Three issues of convertible preference have hit the market this year, offering yields of more than 10 per cent. The issuers are Macquarie Group, Suncorp and Westpac.

Macquarie's Convertible Preference Securities will pay 11.09 per cent until 2013, Westpac's Stapled Preferred Securities will pay a 2.4 per cent margin over the bank bill rate (currently 7.7 per cent) for the next five years. Suncorp's Convertible Preference Shares will pay a margin of 3.2 per cent over the bank bill rate for the next five years.

These returns are high but there are risks. The securities are listed on the Australian Securities Exchange and any investor needing to sell them before their conversion rates will have to take what the market is offering.

Convertibles and other hybrids, such as income securities, resets and step-ups, have been hit as hard as the ordinary shares of the companies issuing them.

If they hold on until the conversion date they may get their cash back or they may receive shares in return - something they may or may not want.

Convertibles are similar to shares in that distributions are not guaranteed. And they are non-cumulative, which means that if the issuer misses a distribution payment, it does not get added on to the next payment.

Lewis Securities' Tony Lewis says the fall in the value of listed hybrids has resulted in some of them now offering effective yields of more than 20 per cent.

Lewis says he has tried to interest his clients in the hybrids of IAG, Paperlinx, Transpacific and Babcock & Brown. "We have clients in these. We don't think they are going broke and the upside looks incredible," he says.

Investors go for cash: p10.

1 YEAR TERM DEPOSITS $10,000                    
Company                         Rate (%)                        
BankWest*               8.70
Suncorp*                        8.70
Bank of Queensland              8.60
HOME BS                 8.60
Railways CU             8.60
Defcredit                       8.50                    
Elders Rural Bank*              8.50                    
IMB                     8.45                    
Macquarie               8.45                    
NAB                     8.40                    
Newcastle Permanent BS  8.40                    
ONLINE SAVING ACCOUNTS (MINIMUM BALANCE >$0)                                            
Company                                 Rate (%)        Revert rate     
BankWest (special rate paid until 1/1/09)       8.50    7.4     
AMP (special rate paid until31/12/08)           8.25    7.05    
St George (special rate paid until 30/11/08)    8.10    7.00    
RaboPlus (special rate paid until 31/7/08)      8.00    7.30    
ING Direct (special rate paid until 30/9/08)    8.00    7.00    
Asgard (special rate paid until 30/9/08)                7.75    6.65 after 6 months     
Qld Professional CU                             7.55    –       
Members Equity Bank                     7.50    –       
Railways CU                             7.50    –
HSBC                                    7.50    Int pay on amnts up to
                                                $1m and each mth you
                                                don’t make a withdrawal
BIG 5 BANKS ONLINE SAVING ACCOUNTS                                      
Company         Product         Rate (%)        
ANZ             Progress Saver**        5.66    
CBA             NetBank Saver   7.00    
NAB             iSaver          7.05    
St George               directsaver^    8.10    
Westpac         eSaver          7.05    
1 YEAR TERM DEPOSITS $10,000                                    
Company         Product                                 Rate (%)
ANZ             Long Term Deposit ($5000-24,999)                8.35
CBA             Long Term Deposit ($10,000-$49,999)             8.20
NAB             Long Term Deposit ($10,000 - $19,999)           8.40    
St George               Long Term Deposit ($5000 - $19,999)             8.10    
Westpac         Long Term Deposit ($10,000 - $19,999)           8.30    
** PAYABLE WHEN YOU MAKE ONE DEPOSIT OF $10+ AND NO WITHDRAWALS PER MONTH * ONLINE ONLY ^BONUS RATE APPLIES UNTIL 30/11/2008, RATE THEN REVERTS TO 7% SOURCE: INFOCHOICE