The certainty trade
A term deposit locks a known rate for a known term. A managed fund — even a cash fund — has a variable return: unit prices and distribution rates move with markets and official interest rates. Whether that trade makes sense depends mostly on the horizon: for money needed at a fixed date within a year or two, rate certainty has real value; for long-horizon savings, historic disclosed returns of growth-asset funds sit well above deposit rates, with volatility along the way. Neither is "safe" in every sense — a term deposit carries inflation and reinvestment risk even while its nominal value is protected.
Protection: DCS for deposits, structure for funds
Since 1 July 2025, deposits at licensed NZ deposit takers are protected by the Depositor Compensation Scheme (DCS) up to NZ$100,000 per depositor, per institution. Managed funds are not covered by the DCS. Their protection is structural instead: scheme assets are held by an independent custodian (not the manager), a licensed supervisor oversees the manager, and the fund's assets are not on any bank's balance sheet — so a manager failure is not the same event as losing the portfolio. The two protections are different in kind: DCS protects against institution failure up to a cap; fund structure protects against manager misuse but not against market falls.
Tax: RWT at up to 39% vs PIE at up to 28%
Term-deposit interest has Resident Withholding Tax deducted at your elected rate, and it is ultimately taxed at your marginal income-tax rate — up to 39%. Most NZ managed funds are PIEs: taxable income is taxed at your Prescribed Investor Rate, capped at 28%. For an investor on the 39% marginal rate, the same 5.00% gross return is worth about 3.05% after tax in a term deposit and about 3.60% after tax in a PIE fund taxed at 28% — a gap created by the wrapper alone. At lower PIRs the gap narrows or disappears. Run your own PIR first.
Liquidity and exit costs
Breaking a term deposit early typically requires the bank's agreement and costs a rate reduction (and some banks require notice or hardship grounds). Managed-fund units can normally be redeemed any business day, settling in a few business days, sometimes with a small buy/sell spread. In the other direction: deposits pay interest to a schedule, while fund returns arrive as unit-price movement and (for some funds) distributions — less predictable, more accessible.
Where the comparison actually bites: cash and bond PIE funds
The sharpest version of this question is not "term deposit vs shares" — it is term deposit vs a cash PIE fund or short-duration bond fund, which hold bank deposits, bank bills and high-grade bonds themselves. There the risk difference is small and the decision reduces mostly to: rate certainty + DCS coverage (term deposit) versus PIE tax treatment + daily liquidity (cash fund). NZ cash-fund fees and disclosed returns are listed on this site so the numbers can be compared directly rather than argued about.