There are many encouraging signs out there for investors, writes David Potts.

Maybe you missed the bus for the sharemarket's great comeback since last year's lows but there's always the next rocket.

A fixed-interest fund, Credit Suisse Global Income, posted an annual return of 60 per cent - twice that of the sharemarket - in the year to the end of January, according to Morningstar.

Considering the yield on your average global bond is barely 3 per cent, it sure burnt up a lot of energy.

The secret was heavy trading and not too many government bonds, I'd say. More your derivatives, syndicated loans and junk bonds.

Or, in Morningstar's words, it takes "highly calculated risks".

But back on Earth, returns can be boosted with very little risk.

In fact, it's easy to be mesmerised by some of the rates the banks are offering on term deposits since they come with no risk at all.

That could prove an expensive mistake, especially if you have debts you could be paying off instead. Although the banks have lifted mortgage rates by the same as the Reserve Bank's 0.25 of a percentage point increase, they haven't budged on deposits. If anything, term deposit rates seem to be falling.

The top rate three months ago was 8 per cent for five years from Westpac. Today it's 7.85 per cent from the Bank of Cyprus, while Westpac's latest offering is a miserly 7.05 per cent.

Yet online at-call deposit rates are going up with the Reserve Bank's official moves.

RaboPlus pays 5.75 per cent at call, though it's conditional on increasing your balance by $200 each month, which maybe doesn't really make it an at-call account. Since the bank doesn't discriminate between customers, that also makes it the highest rate on offer for DIY super funds and small businesses.

Incidentally, if you have money in an online account, it might pay to check the rate.

Some rates being advertised are just honeymoons of two or three months and usually don't apply to existing customers.

"The rates are for new customers and existing ones often think they're getting it as well when they're not," says the general manager of RaboPlus, Greg McAweeney.

With the Reserve Bank talking about another one to three rate rises to get the place back to normal, it's not hard to imagine at-call rates approaching the three-year term rate.

So what's the point in committing for three or even five years? Very little, if you ask me. You'd have to be convinced that once the Reserve gets rates back to normal, it's going to turn around and cut them again.

I don't think so.

On the contrary, it's becoming more likely that we'll hit normal sooner than the market is speculating - which is the end of the year, probably because of its nice symmetry of one rise a quarter and reassuring sense of closure - and before too long will be veering towards tightening. The Reserve has even been dropping a few oblique hints.

For one thing, normal has shifted even if you hadn't noticed the earth move under you.

Before Christmas we were but a hair's breadth away. The average mortgage rate over time is about 7.5 per cent and the Reserve was saying we were almost there. Indeed, we were just two leisurely rate rises from it.
But since then the distance to normal has increased from two to four rate rises, one of which we've just had.

And if the mining investment boom is only half as strong as surveys are showing, then the Reserve will be tightening by the end of the year, perhaps even in 50-basis-point chunks.

Far-fetched? Maybe - but the stars are lining up.

We already know the $43 billion Gorgon gas project on the north-west shelf will go ahead. That by itself is almost as big as the entire 1980s resources boom.

There's $113 billion involving 74 projects either "under construction or committed", the October six-monthly update by the Australian Bureau of Agricultural and Resource Economics shows. That's 40 per cent more than it reported six months earlier.

Even the Reserve Bank has said this will be our biggest investment boom so far.

The last time we had such heavy investment was in the '80s, when term deposits reached 13 per cent, though it was a completely different economy then.

There's no sign of a slowdown in demand for resources by China, India or the rest of Asia.

Then there's the rising cost of global funds. By this time next year the US will probably be lifting interest rates, which will reverberate right through the financial system.

Its economy is expected to be growing again some time next year.
To raise more funds so they can lend for this, the banks are going to have to pay more, including on term deposits. Worse, they'll be competing against near-bankrupt governments around the world for funds.

So whether the Reserve Bank intends it or not, rates are going to rise as the investment boom takes off. That's why a smorgasbord approach to term deposits is better so you're not putting all your eggs into one term.

Spread the maturities out so that each matures at a different time in the rate cycle.

And keep some of your funds in the online accounts so you can take advantage of any red light special term-deposit rates that the banks occasionally offer.

Besides, you'd have to wonder whether the extra 50 basis points gained from fixing an extra four years is worth being tied down.

At the moment, some of the best rate deals are for terms around six to nine months. ANZ, for example, is paying 6.3 per cent for a nine-month term deposit, says Canstar Cannex.

Incredibly, this is more than it's paying for one- or two-year terms.
At the other extreme are Heritage Building Society's unsecured notes, which pay a fixed 10 per cent for five years, then the rate floats.

Frankly, when interest rates are rising you don't want to be trapped in anything with a fixed coupon. Not only is there the lost interest but, worse, the capital value drops.

While you can't lose your money if you hang on to a bond until its maturity, you sure can if you have to cash it in sooner. So forget government bonds, which, in any case, are only paying about 5.5 per cent. Not to mention the extra interest you're missing out on while you hang in there. But for only a little extra risk, it's possible to double the returns from bonds.

The trick is to find a floating rate bond fund so your returns rise as interest rates go up.

Perpetual's Diversified Income Fund should return at least 10 per cent this year after fees, says its head of credit, income and multi-sector, Michael Korber. "It's perfectly liquid," he says. "It kept its capital in the downturn, unlike a lot of funds that were down 30 per cent, 40 per cent."

The fund holds mostly investment-grade corporate bonds that aren't easily available to small investors.

PIMCO launched a special fund a year ago to take into account the lessons of the global financial crisis.

The Australian Focus Fund tends to stay short and cashed up and returned 9.5 per cent in its first year.

"Most term deposits lock you in for a long period but with a fair bit of volatility, you don't want to be locked into anything for too long unless you're certain you won't need the cash," says PIMCO's head of global wealth management, Peter Dorrian.

Then there are real estate investment trusts, or REITs, nee listed property trusts.

Their unit prices have been savaged so, even with their lower distributions, REITs are offering double-digit yields.

The Commonwealth Property Office Fund, for example, is yielding almost 11 per cent.

Remember, REITs' yields come with deferred tax advantages as well, thanks to building allowances and depreciation.

Then there's the chance of a capital gain.

REITs have soared 55 per cent in the past year, doing even better than the rest of the sharemarket.

But didn't they prove to be a lot riskier than everybody thought?

Sure did but things have changed.

Thanks to a succession of capital raisings, they've reduced their debts and have stronger balance sheets.

The much-feared collapse of commercial property prices never eventuated. Neither did a housing crash.

Other well-regarded REITs likely to lift their distributions are Colonial First State's Retail Property Trust (currently yielding 6.5 per cent), Dexus (7.4 per cent), ING Office Fund (6.3 per cent) and Stockland (6.6 per cent).
The biggest, Westfield, also is the most heavily involved in the US. It is yielding 7.7 per cent, based on Friday's close.

Dexus and ING Office Fund are likely to benefit the most as the economy picks up.

Although the yields on REITs follow interest rates closely, so rather than a capital gain there's the prospect of a loss as rates rise, distributions should rise with higher rents as the economy recovers. Office space is already reasonably tight in most cities.

Most analysts expect REITs to post double-digit returns this year.
Infrastructure trusts have also been heavily marked down, leaving them with yields ranging from 9.1 per cent (APA Group) to 11.2 per cent for SP Ausnet (which is also partially franked so offers tax benefits as well).
The returns on so-called hybrids, a cross between bonds and shares, will go up with interest rates but come with a franking credit and the possibility of capital gains.

Usually called something such as converting preference shares, since they don't promise to give you cash back but rather shares in the mother company (albeit at a discounted price), their returns rise with interest rates.
Although they're fully franked, the calculation is done differently to shares.

With hybrids, the franking credit comes first, not last. That means it's already taken into account so a 7.5 per cent fully franked yield, instead of being more than 10 per cent, is really based on about 5 per cent. Unlike shares, though, the payments are quarterly.

Banks' hybrids yield slightly more than their shares. For example, after taking franking into account, ANZ's shares yield 6.1 per cent compared with 7.3 per cent for its hybrid, which, in effect, has a six-year term.

But non-bank hybrids are better yield boosters. IAG's hybrids pay a yield of about 8.2 per cent, 4 per cent above the bank-bill rate, including franking.

For the more daring investors, there's always the PaperlinX hybrids (PXUPA), which yield 25 per cent. 

Smart thinking pays off

WHILE lenders have been lifting home rates another 25 basis points, Joanne Goh (pictured) has given herself about four rate cuts.

The trick was in building up equity and finding a savvy mortgage broker.
Joanne, who works in marketing and communications at  Advantage Financial Services, bought her home three years ago and about 18 months ago fixed half of her loan at 8 per cent.

Fixing turned out to be a big mistake, though luckily, it was for only 18 months.

And because Joanne was paying more off on the variable part, the equity in her home was rising.

"It's smart thinking to put extra cash into a home loan," she says.

She's already reaping the reward because HomeSide will knock 92 basis points off the bank standard variable rate for borrowers with a deposit or equity of at least 25 per cent.

An adviser at mortgage broker Smartline, Michael Sugiandi, negotiated a split loan for Joanne that can be adjusted annually.

Needless to say, Joanne didn't fix this time. "That kind of backfired last time," she says.

Besides, she can afford another four rate rises before she need even think about fixing.