Comparing Investment Products
Not all investments are created equal. A term deposit guarantees 4.5% but locks your money away. A growth portfolio targets 9% but can lose 20% in a bad year. In this lesson, you will compare products mathematically — calculating net returns, adjusting for fees and tax, and understanding why the highest rate is not always the best choice.
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Three printable worksheets that build from foundations to mastery — or build your own from any module’s questions.
Product A: 5% p.a., guaranteed, no fees.
Product B: 8% p.a. average return, 1.5% fees, returns vary year to year.
Over 20 years — which product would you expect to grow faster? Is there any scenario where Product A wins?
The mathematically correct way to compare investments is to calculate the net return after all fees and taxes, then project it over your time horizon.
Every comparison follows the same four steps. Skip any step and your comparison is meaningless — you are comparing the wrong numbers.
- Step 1: Find the gross return (advertised rate).
- Step 2: Subtract fees: $r_{\text{net}} = r_{\text{gross}} - r_{\text{fees}}$
- Step 3: Apply tax if applicable: $r_{\text{after-tax}} = r_{\text{net}} \times (1 - t)$
- Step 4: Compare using $FV = PV(1 + r_{\text{net}})^n$ for each product.
Key facts
- How to compare investment products using net return
- The impact of fees on long-term growth
- Tax treatment of different investments
Concepts
- The risk-return trade-off and time horizon interaction
- Why compounding magnifies small return differences
- When guaranteed returns beat variable returns
Skills
- Calculate net and after-tax returns
- Compare products using $FV = PV(1+r)^n$
- Evaluate fee impact in dollar terms over long periods
- Recommend products for different risk profiles and time horizons
The advertised rate is almost never the true return. To compare honestly, you must calculate the net return and project the future value.
$PV$ = initial investment, $r_{\text{net}}$ = annual net return (after fees), $n$ = years
Example — $50,000 over 20 years:
| Product | Gross | Fees | Net | FV (20 yrs) |
|---|---|---|---|---|
| Term Deposit | 4.5% | 0% | 4.5% | $120,300 |
| Managed Fund | 7.0% | 1.0% | 6.0% | $160,400 |
| Growth Portfolio | 9.0% | 1.5% | 7.5% | $212,200 |
The growth portfolio yields 76% more than the term deposit after 20 years — but only if it achieves its average return. In a market crash, the term deposit holder sleeps soundly while the growth investor can lose 20% of capital.
Step-by-step comparison: Gross rate → subtract fees → apply tax → calculate $FV = PV(1+r)^n$ → compare; After-tax return: $r_{\text{after-tax}} = r_{\text{gross}} \times (1 - t)$. Always convert before comparing.
Pause — copy the after-tax return formula $r_{\text{after-tax}} = r_{\text{gross}} \times (1-t)$ and the comparison chain (gross → subtract fees → apply tax → compute $FV = PV(1+r)^n$) into your book.
Quick check: A managed fund advertises 7% p.a. with 1.2% annual fees. What is the correct net return to use when comparing future values?
Worked examples · 3 comparison scenarios
$30,000 invested for 15 years. Product A: term deposit at 4.8% p.a., no fees. Product B: balanced fund at 6.5% p.a. gross, 0.8% fees. Which product has the higher FV? By how much?
$20,000 over 10 years. Product X: high-interest savings at 6% p.a., taxed at 32.5%. Product Y: index fund at 7% p.a. net, returns taxed as capital gains (15%). Which wins after tax?
A managed fund has gross return 7% p.a. At what fee level does it underperform a term deposit at 4.5% over 20 years (assuming $50,000 initial, same tax treatment)?
Did you get this? True or false: the product with the highest advertised gross return is always the best investment.
We just saw that a 1% fee on $50,000 over 20 years costs $27,735 in lost compounding — numbers make the choice clear. That raises a question: numbers alone don't tell you which product suits your situation — what role does risk tolerance and time horizon play? This card answers it → matching short/medium/long-term horizons to appropriate risk levels using the risk-return trade-off.
Higher expected returns always come with higher risk. The key question is not "what is the highest return?" but "can you afford the downside?"
Mathematical insight: Over long time horizons, the standard deviation of annual returns matters less because good years offset bad years. This is why young investors can afford growth assets — time is their risk reducer.
At 40 years, 7.5% net grows roughly 3× more than 4.5%. Time horizon is the deciding factor.
Risk-return trade-off: higher returns → higher risk (capital loss or volatility); Time horizon changes the appropriate product: short-term = safe; long-term = growth
Pause — copy the risk-return principle (higher return = higher volatility/capital risk) and the horizon rule (short-term: capital preservation; medium: balanced; long-term: growth assets) into your book.
Fill in the blank: To find the after-tax return: $r_{\text{after-tax}} = r_{\text{gross}} \times (1 - \_\_\_)$. For a savings account at 6% taxed at 32.5%, the after-tax return is ___% .
Common errors · the 3 traps that cost marks
Match each investor to the most appropriate product:
Quick-fire practice · 4 calculations
$50,000 over 20 years. Term deposit at 4.5%, managed fund net 6%, growth portfolio net 7.5%. Calculate FV for each product.
A managed fund increases fees from 1% to 2%. Gross return stays at 7%. What is the new net return? Over 20 years on $50,000, how much does the 1% fee increase cost in dollar terms?
A savings account pays 6% p.a. taxed at 32.5%. Is this better or worse than a term deposit at 4.5% p.a. (not taxed separately)? Show the after-tax calculation.
A 25-year-old invests $50,000. Recommend a product for a 40-year retirement horizon. Use numbers to justify: what FV does the growth portfolio (7.5% net) achieve vs term deposit (4.5%)?
Did you get this? True or false: a 60-year-old investor who needs their money in 5 years should generally invest in a growth portfolio rather than a term deposit.
Earlier: Product A (5% guaranteed) vs Product B (8% gross, 1.5% fees). Product B's net return is 6.5%. Over 20 years: $50,000(1.065)^{20} = \$176,000$ vs Product A's $50,000(1.05)^{20} = \$132,665$. Product B wins by $\$43,335$.
However, Product A wins if: (1) the investor needs the money within 1–3 years and cannot risk a market downturn; (2) Product B underperforms significantly; (3) the investor values certainty over maximum return. Risk tolerance and time horizon matter as much as the numbers.
Pick your answer, then rate your confidence — that tells the system what to drill next. Each retry pulls a fresh mix.
Q1. An investor has $30,000. Product A: term deposit at 4.5% p.a., no fees. Product B: balanced fund at 6.5% p.a. gross, 0.8% fees. (a) State the net return for each product. (b) Calculate the FV of each product after 15 years. (c) State which product wins and by how much. (3 marks)
Q2. A managed fund earns 6% p.a. gross, taxed at 32.5%. (a) Find the after-tax return. (b) Compare to a term deposit at 4.5%. (c) Which product gives a higher after-tax return? (3 marks)
Q3. $100,000 is invested in a growth portfolio at 8% p.a. net for 25 years, and simultaneously in a term deposit at 4.5% p.a. for the same period. (a) Calculate both FVs. (b) Find the dollar difference. (c) Explain why the same mathematical result does not mean the growth portfolio is always the better recommendation for all investors. (4 marks)
Comprehensive answers (click to reveal)
Drill answers:
1. TD: $50,000(1.045)^{20} = \$120,300$. MF: $50,000(1.06)^{20} = \$160,400$. GP: $50,000(1.075)^{20} = \$212,200$.
2. New net = 5%. $FV = 50,000(1.05)^{20} = \$132,665$. Previously $160,400. The 1% fee increase costs $\$27,735$ over 20 years.
3. After-tax savings = $6\% \times 0.675 = 4.05\%$. Term deposit at 4.5% > 4.05%, so term deposit wins.
4. Growth at 7.5% for 40 years: $50,000(1.075)^{40} = \$50,000 \times 17.4 = \$871,000$. TD at 4.5%: $50,000(1.045)^{40} = \$50,000 \times 5.82 = \$291,000$. Recommend growth portfolio — 40-year horizon allows time to absorb downturns.
Q1 (3 marks): (a) Product A: 4.5%. Product B: 6.5% − 0.8% = 5.7% [1]. (b) $FV_A = 30,000(1.045)^{15} = \$58,300$ [1]; $FV_B = 30,000(1.057)^{15} = \$69,240$ [1]. (c) Product B wins by $\$10,940$.
Q2 (3 marks): (a) After-tax = $6\% \times (1 - 0.325) = 4.05\%$ [2]. (b) Term deposit: 4.5% after-tax (assumed no tax impact). 4.05% < 4.5% [1]. (c) Term deposit wins.
Q3 (4 marks): (a) Growth: $100,000(1.08)^{25} = \$684,850$ [1]; TD: $100,000(1.045)^{25} = \$296,000$ [1]. (b) Difference $= \$388,850$ [1]. (c) Growth portfolio involves market volatility — a 60-year-old needing money in 5 years cannot risk a significant loss. Time horizon and risk tolerance determine suitability, not just expected returns [1].
Five timed questions on net returns, FV comparisons and risk-return analysis. Beat the boss to bank a tier — gold (90% + speed), silver (75%), bronze (50%). Replays welcome.
⚔ Enter the arenaClimb platforms using investment comparisons, net returns and risk-return analysis. Pool: lessons 1–16.
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