What are the odds?

By the end of March 2009, nearly 2.6 billion Bonus Bond units had been issued – making it the largest retail unit trust in New Zealand.

If you owned 20 of those (the minimum investment is $20), your chance of winning the first prize of $1 million in the monthly draw is around 1 in 130 million. This is almost 50 times worse than your chance of winning Big Wednesday with a standard 6-line ticket at a cost of $6.

Your chance of winning a small prize – thousands of $20 prizes are given out monthly – is much greater. But the odds are never better than 1 in 9600.

Is it a good deal?

If you’re happy to be in a lottery, what you need is a decent-sized prize pool. That means you don’t want too much “leakage” from the pool in fees, expenses and tax.

Fees and expenses
The Bonus Bonds’ fund manager (ANZ Investment Services) is paid a fee of 1.3 percent of the gross value of the scheme’s funds. And the financial statements of past years suggest that expenses deduct another 0.1 percent.

At a total of 1.4 percent, these are expensive leakages. It’s possible to find other large cash-and-bond funds that have fees and expenses (“management expense ratios”) of less than 0.7 percent. AMP Capital NZ Cash Fund, for example, has a management expense ratio of 0.63 percent.

Tax
Your Bonus Bonds' prizes (if any) are taxed at 30 percent and all prizes are distributed on a tax-paid basis. So if you’re on a tax rate lower than this and you win a prize, you’re paying more tax on it than you would on the interest income you’d get from a cash PIE (see our news item for more about cash PIEs).

If you’re on a higher tax rate, the Bonus Bonds tax policy works to your advantage just like a cash PIE.