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                                         First Home Withdrawal funds should be lower risk

Q.        Over the past 5 years my wife and I have been building up our KiwiSaver funds to buy our first home. Because we are young we chose a growth fund, and our returns have been very good. But now we are worried about the sharemarket going down and what effect that is having on our KiwiSaver. We have started looking at properties and hope to buy something within the next 3 months. We expect to be able to withdraw $40,000 between us and qualify for $10,000 with the HomeStart grant as well. 

A.       Investing in a growth fund over a short term is a gamble which does not always pay off. Most growth funds performed very well up until the middle of this year, but sharemarket falls that started in China and then spread around the world are delivering negative returns to most growth KiwiSaver funds. Looking at two of the larger providers ASB and ANZ, their growth funds have declined between 2% and 3% over the past 3 months. 
 
It is entirely possible for a growth fund to drop by 20% or more over a 12 month period. According to the Sorted Fundfinder tool, the average return for KiwiSaver growth funds for the 12 months to 31 March 2009 was -17.67%.   While we would hope that we are not going to go through another Global Financial Crisis, growth investors have to be prepared for that level of volatility at any time. Therefore a growth fund is no place for KiwiSaver First Home savings, which could be called upon at short notice. 
 
With $40,000 at stake, a drop of 3% translates into $1200. That is a lot of money when you are buying your First Home. A drop of 10% or more could postpone your home buying plans altogether. 
 
Since 1 June 2015 KiwiSaver investors have been able to withdraw all but $1000 from their accounts for that First Home. This has resulted in a big increase in the number of First Home buyers around the country, and some big withdrawals from KiwiSaver. When returns are positive it is easy to become complacent and forget about the downside. However, investors need to be disciplined and anyone looking at a First Home Withdrawal over the next 5 years should make sure that they are in the right fund. The amount you have invested does make a difference – someone with $50,000 will be hit harder by a 10% drop than someone with $5,000. 
 
According to FundFinder, the long term average of conservative funds has been 5.01% per annum, 6.93% per annum for balanced and 8.55% per annum for growth. There is more to lose than there is to gain by chasing short term returns. 
 
Find out early on what options your fund manager has, and how easy it is to move from a growth fund to a balanced or conservative fund. While a balanced fund may sound like the best of both worlds, you can still expect falls of 10% or more at any one time. Some fund managers allow you to move the bulk of your money to a low risk fund, while continuing your regular contributions into a higher risk fund. That could be a useful strategy for First Home buyers who are still two or three years away from buying. Risk tolerance is a personal matter and while general rules apply, in the end it comes down to the individual appetite for risk. 
 
Once you start house hunting, a cash fund is the best place to be as that will give you certainty. 

As published in the HB Today 28 September 2015
 
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 06-870 3838 or go to www.peak.net.nz. The information contained in this article is of a general nature and is not personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.nz