For many investors – particularly retirees or those relying on investment income – the central challenge is balancing two competing risks:
- The risk of taking on higher yielding (and therefore higher-risk) assets; and
- The risk that ultra conservative investments, such as bank accounts and term deposits covered by the government guarantee, can’t be relied on to meet living costs or keep pace with inflation.
Understanding this balance is essential to long-term financial sustainability.
Risk-free won’t always be income-sufficient
Australian banks, term deposits and savings accounts are widely perceived as ‘risk-free’ because deposits up to $250,000 per account holder, per Authorised Deposit-taking Institution (ADI), are protected under the Financial Claims Scheme (FCS), commonly known as the government guarantee. While this protection is valuable, it comes at a cost: low returns.
Even as interest rates have risen from their record lows, the RBA cash rate after the February 2026 meeting was 3.85% in early 2026. Term deposits and other savings accounts generally price off this cash rate, meaning those products generally yield a small margin over the cash rate.
As at 20 February 2026, the highest paying savings accounts were yielding up to 4.60% p.a. (as an ongoing rate) while the highest paying 12 month term deposits were yielding up to 4.88% p.a.
Importantly, term deposits don’t deliver monthly income. If you need to live off the interest your account earns, you need to wait until the term expires, take the income you need, and reinvest the remainder back into a new term deposit. The highest paying term deposits also have longer terms of 12 months or more. In some cases, up to five years.
Meanwhile, inflation over the 12 months to December 2025 was 3.8%, according to the ABS. In real terms, that means many conservative investors are running just to stand still.
In short: risk free free returns may protect your capital, but they may not protect your lifestyle.
To earn higher income, risk is unavoidable
There is a simple truth in finance:
Any return above the ‘risk-free rate’ requires taking risk.
That risk might relate to credit, liquidity, asset volatility or broader market conditions. Investors who rely solely on bank accounts and term deposits may avoid these risks – but accept the alternative risk of insufficient income.
Higher yielding investment options – such as income funds, credit products, property backed debt, or diversified income trusts – seek to bridge this gap by generating a premium above the cash rate. But they must take on risk to do so.
The key question becomes:
How much risk is being taken – and how is it being managed?
Risk management: Where skill, structure and process matter
Not all risk is equal. The quality of risk management determines whether a higher yield investment is disciplined and measured, or reckless and speculative.
Professional investors use a wide range of tools and processes to manage portfolio risk. Once you step beyond the risk free rate, applying as many of these disciplines as possible becomes essential to moving up the yield curve in a controlled, well managed way.
These tools include:
1. Diversification
By spreading loans or assets across industries, borrowers, regions and property types, no single exposure can overly influence investor outcomes.
2. Stringent asset and loan screening
Credit quality is not assumed, it is assessed. This includes:
- Detailed borrower analysis
- Assessment of serviceability
- Review of project feasibility (for property related loans)
- Stress testing against potential adverse developments or market movements
3. Loan-to-valuation ratios (LVRs)
By only lending up to a percentage of the value of the security asset, it gives markets room to fall before the risk of capital loss to the portfolio becomes significant.
4. First registered mortgage security
Holding a first-ranking mortgage over real property provides the strongest recovery prospects if a borrower defaults. Second mortgages rank behind first mortgages in priority and therefore offer weaker security. Unsecured loans provide even less protection. An equity position – ownership rather than credit – offers the lowest level of security, as investors are repaid only after all creditors.
5. Lending committee
A lending committee is a group of professionals tasked with evaluating whether to lend money to a particular borrower for a defined purpose. Committee members may be permanent employees of the lending organisation or independent external experts. Independent members help reduce emotional or commercial bias, promoting more consistent and objective decision making.
6. Experienced lending professionals
Experience matters – especially across different credit cycles. Skilled credit assessors and committee members can identify risks that automated models or inexperienced financiers may overlook.
Having team members with expertise in the borrower’s industry further strengthens assessment quality, providing deeper insight into the borrower, the loan purpose and the project itself. This specialised knowledge also enables better support for borrowers, particularly when guidance can help keep projects on schedule and ensure capital and interest payments remain on track.
7. Active monitoring of loans and underlying assets
Risk is not static. Professional managers continuously monitor:
- Project progress
- Borrower performance
- Valuation movements
- Interest coverage
- Market conditions
Ongoing oversight enables fast intervention if issues arise.
The risk / return equation in practice: Trilogy Monthly Income Trust
The Trilogy Monthly Income Trust (the Trust) aims to generate income above the cash rate by investing in a diversified portfolio of property secured loans. Returns are not guaranteed, capital is not protected by the government guarantee, and the investment carries risk.
But the Trust’s investment philosophy recognises that not taking risk can also be risky, especially for investors needing steady, inflation beating income over time.
By applying structured risk management disciplines – diversification, LVRs, active oversight and experienced committees with independent members, the Trust pairs strong income potential with structured controls. These settings manage risk with intent, not optimism. For over 19 years, these disciplines have delivered the outcomes investors expect and continue to rely on for income performance.
Learn more about the Trilogy Monthly Income Trust
Finding the balance that works for you
Investors face a spectrum of choices:
Bank accounts, term deposits, and at call savings
- Government guaranteed
- Low risk
- Usually, low returns that may not meet income needs or exceed inflation
Higher yielding investment products (eg. income funds, credit trusts)
- Not government guaranteed
- Offer potentially higher income
- Require acceptance of managed investment risk
The right balance depends on your:
- Income needs
- Time horizon
- Risk tolerance
- Liquidity needs
- Broader financial strategy
A blended approach – combining risk free and risk managed assets – often gives investors the reliability they need and the income they require.
Conclusion
Balancing risk is not about avoiding it entirely. It is about choosing the risks you are willing to accept in pursuit of the returns you need. In a world where inflation routinely hovers around or above deposit rates, risk free investments may preserve your capital but compromise your lifestyle.
Risk managed income strategies, supported by strong governance, diversification, first mortgage security, and active monitoring, aim to deliver a practical middle ground – higher income potential without reckless exposure.
This is the trade off at the heart of modern income investing: accept some risk, or accept the risk of falling behind.
Discover reliable monthly retirement income
This article is issued by Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) as responsible entity for the Trilogy Monthly Income Trust ARSN 121 846 722. Application for investment can only be made on the application form accompanying the Product Disclosure Statement (PDS) dated 3 May 2024. The PDS and Target Market Determination (TMD) dated 3 May 2024 for the Trilogy Monthly Income Trust ARSN 121 846 722 are available at www.trilogyfunds.com.au. The PDS contains full details of the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making a further investment. All investments, including those with Trilogy Funds, involve risk which can lead to no or lower than expected returns, or a loss of part or all of your capital. Trilogy Funds is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy Funds are not bank deposits and are not government guaranteed. Past performance is no indicator of future performance.
