When I first joined KiwiSaver through my employer I didn’t put too much thought into it. I contributed up to the employer match which was 3% back then and called it a day. Like many, I was enrolled in a default fund without checking if it was aligned with my goals.
Fast forward a few years at a different job, an AMP representative came to the office to sign people up to their KiwiSaver. It seemed like a perk at the time, so I switched. The only good thing I did was to go with “life stage fund” where they automatically invest in a fund according to your age.
It’s only once I understood more about investing that I realised I wasn’t in the right fund.
Since I was in my early 30’s and had many years until retirement I wanted to invest aggressively. Buying a house felt out of reach so it didn’t influence my KiwiSaver choice.
Looking back, I wish I’d understood that your KiwiSaver should match your goals, timeline and risk tolerance instead of leaving it up to chance.
What’s actually in a KiwiSaver fund?
Before we dive into the different types of funds, let’s look at what’s actually in them. These are called asset classes. Here are the main ones:
- Cash: Money in term deposits or short-term investments. Lowest risk but also lowest return.
- Bonds: Loans to governments or companies that pay interest. They’re more stable than shares but returns are also lower. Think of them a bit like term deposits.
- Property: Investments in real estate (almost always commercial properties) or listed property funds. They can provide steady income and growth.
- Shares: Ownership in companies. They offer higher potential returns but more ups and downs.
Growth and aggressive funds invest heavily in shares while defensive and conservative funds hold more cash and bonds.
That mix – which is also called your asset allocation – is the biggest factor influencing your long-term results so it’s worth taking some time to do your research.
How to choose the right fund
Choosing the right fund depends on many factors and should be tailored to your situation. I’d recommend using a few helpful tools to make a decision. Check out Sorted’s KiwiSaver questionnaire and their Smart Investor comparison tool to get started.
You’ll have to ask yourself questions like:
- How long before I intend to use my KiwiSaver money? Is it for a first home or retirement?
- What range of gains or losses am I comfortable with? Could I stomach a roll coaster ride from my investment?
- What’s most important to me while saving? Getting the highest returns or getting back at least as much as I put in?
This will help you understand your risk tolerance. Remember, there are no right or wrong answers here. The important thing is to be honest with yourself. For example, how did you react to your investments during the pandemic when the markets crashed?
Types of KiwiSaver funds
Now let’s look at the different types of KiwiSaver funds. They fall into five categories based on their risk level:
Defensive funds
The lowest risk out of all the funds. They usually hold around 0–10% in shares, rest is cash and bonds. Your balance is unlikely to fall, but equally it’s going to grow at a very slow pace over the years.
These funds suit people who intend to spend their KiwiSaver money within 3 years, either on a first home or retirement. Compared to stocks, there is very little chance that your balance drops within such a short time period.
They also suit those who don’t want to take risks with their money for other reasons.
Conservative funds
Also relatively low risk. They typically hold about 20–35% in shares, the rest in cash and bonds.
These funds are for short-to medium term investors or first home buyers with a 3–5 year time frame. You can expect small ups and downs with steady growth over time. You’ll likely earn more than a defensive fund but not nearly as much as a higher risk fund.
Balanced funds
These are the medium-risk funds with about 40–60% in shares, the rest in cash and bonds. They work well for people who want a middle ground: they’re comfortable with some volatility but not ready to go all in on growth assets or they expect to spend the money within 5–10 years. As the name implies it’s a reasonable balance between risk and return. Your balance will rise and fall with the market, but the swings won’t be quite as dramatic as a growth fund.
People who are auto-enrolled in KiwiSaver are put into a balanced fund by default unless they specifically chose another fund. If this is you, then hopefully by the end of this post you’ll have a better idea of which fund is right for you even if it ends up still being a balanced fund.
Growth funds
Now we’re dialing up the risk levels. Growth funds hold around 70-90% in shares, the rest in cash and bonds. They suit investors with a long-term horizon (think decades away from retirement) who can ride out market drops. Imagine your $100,000 suddenly dropping to $60,000. You have to be able to stomach swings like that without being tempted to switch funds in “bad” times as that’s a guaranteed way to lock in losses and lose money.
Returns of these funds can vary year to year but historically, they’ve performed better over time than conservative ones. That’s why you should be expecting to spend the money in 10 years or more–no sooner.
Aggressive fund
The funds with the highest risk level of them all. They hold 90–100% in shares and will be volatile. Like growth funds, these are aimed at investors who don’t intend to spend their money in the next 10 years and are comfortable with market swings. It’s not for the faint of heart as you’ll witness the biggest ups and downs but also the highest potential returns.
Tools to help you decide
You don’t have to figure it all out alone. Fortunately, Sorted.org.nz offers some great resources to make the right decision:
- The KiwiSaver Fund Finder helps you find a fund type based on your situation and risk tolerance
- The Smart Investor comparison tools helps you compare fees and performance across providers.
These tools make it easy to see if your current fund still fits your needs or if it’s time for a change. Keep in mind that high fees directly eat into your returns which can really add up over time. I prefer funds that offer very low fees, all things being equal.
Final thoughts
KiwiSaver is one of the most powerful ways to build wealth in New Zealand and it’s a good idea to join.
Your fund choice is very important so don’t leave it up to chance or stay stuck in a default fund. It can make a big difference over time. Even a small shift from a conservative to a growth fund early in your career could mean tens of thousands more by retirement.
So spend 10 minutes this week checking your KiwiSaver. A small review now could mean tens of thousands more by retirement.