Bonds in Your KiwiSaver (NZ, 2026): Why the 'Safe' Part Can Still Fall

Conservative KiwiSaver funds are mostly bonds and cash, and bonds fall when interest rates rise. That's why 'safe' funds lost money in 2022 — the average conservative fund was down about 8.1% over the year to September 2022. Here's how the rate/bond seesaw works and what it means for your fund.

TL;DR: Conservative KiwiSaver funds hold roughly 65-90% in income assets like bonds and cash ². Bonds fall in value when interest rates rise, which is why the average conservative fund lost about 8.1% over the year to September 2022 ¹. "Safe" means lower swings over time, not no swings — even conservative funds have a down year about 1 year in 7 ⁷.

A lot of people are surprised to learn their "safe" KiwiSaver fund can lose money. It happened on a noticeable scale in 2022, when conservative funds — the ones marketed as low-risk — went backwards. The reason sits in what those funds actually hold: mostly bonds. And bonds, despite their steady reputation, can fall in value.

This article explains what bonds are, why your KiwiSaver holds them, how the relationship between interest rates and bond prices works, and what all of it means when you're choosing between a conservative and a growth fund. It's general information, not a recommendation about your own fund.

What are bonds and why does my KiwiSaver hold them?

A bond is a loan. When a government or company needs to borrow money, it can issue a bond — effectively an IOU that pays a set rate of interest (the "coupon") for a fixed term, then repays the original amount at the end. Buy a bond and you're the lender, collecting those interest payments along the way.

Bonds are grouped with cash as income assets (sometimes called defensive assets), as opposed to growth assets like shares and property. KiwiSaver funds hold them for two sensible reasons:

Steadier returns. Bond prices generally move far less than share prices day to day, so a fund holding more bonds tends to have a smoother ride.
Income. Those regular interest payments give the fund a predictable stream of return that doesn't depend on share markets rising.

That's why the more conservative a fund is, the more bonds and cash it holds. It's a deliberate trade: you give up some of the long-run return that shares provide in exchange for smaller ups and downs. The catch — and it surprised many people in 2022 — is that "smaller ups and downs" is not the same as "no downs."

Why did 'safe' conservative funds fall in 2022?

In 2022, interest rates rose sharply around the world, and New Zealand was no exception. To rein in inflation, the Reserve Bank of New Zealand (RBNZ) lifted the Official Cash Rate (OCR) repeatedly, on its way to a peak of 5.50% reached in May 2023 ⁵. Rising rates are normally framed as good news for savers — but for existing bonds, they're a problem.

When market interest rates rise, the value of bonds already issued at lower rates falls. Because conservative funds are mostly bonds, that fall flowed straight through to their returns. The numbers tell the story:

KiwiSaver risk type	Roughly what it holds	What happened in 2022
Conservative	~65-90% income assets (bonds and cash) ²	Average fund down ~8.1% over the year to 30 Sep 2022 ¹
Balanced	~35-63% growth assets ²	Hit by both falling bonds and weaker share markets
Growth / Aggressive	63-100% growth assets ²	Mostly hit by falling share markets, not bonds

Income-asset bands from Sorted's Smart Investor; conservative fund figure from Morningstar's KiwiSaver survey ¹².

What made 2022 unusual is that bonds and shares fell at the same time. Normally bonds hold up — or even rise — when shares wobble, which is the whole point of holding them. In 2022 the very thing driving shares down (rapidly rising interest rates) was also dragging bonds down. So the "safe" part of conservative funds didn't cushion the fall; it added to it.

How does the interest rate / bond price seesaw work?

This is the mechanism behind the whole article, so it's worth getting right. Bond prices and interest rates move in opposite directions ³. Picture a seesaw: when rates go up, bond prices go down, and when rates come back down, bond prices go up.

The plain-English version: imagine you hold a bond paying 4% interest. Then new bonds start being issued paying 6%, because the OCR has risen. Nobody will pay full price for your old 4% bond when they can get a fresh 6% one — so the market value of your bond drops until its return is competitive again. You haven't lost any interest payments, but the price someone would pay you for that bond today has fallen. Inside a KiwiSaver fund, that price drop shows up as a lower balance.

Figure — the interest rate and bond price seesaw

``` Rates UP ↑ ↓ Bond prices DOWN \ / \ SEESAW / \________________________/ / \ / \ Rates DOWN ↓ ↑ Bond prices UP

2022: OCR climbing fast toward its 5.50% peak (May 2023) ⁵ → existing bond prices fell → average conservative KiwiSaver fund down ~8.1% over the year to Sep 2022 ¹ ```

Illustration of the inverse rate/bond-price relationship, with the 2022 example annotated. Sources: RBNZ on the OCR ³⁵; conservative fund returns via Morningstar ¹.

A couple of points worth understanding. First, the longer a bond's remaining term, the more its price moves when rates change — long-dated bonds are more sensitive than short-dated ones. Second, this is a paper, mark-to-market move. If a fund holds a bond to maturity, it still gets its interest and its money back; the price dip is a valuation in the meantime, not necessarily a realised loss. That's part of why bond falls tend to recover, which we come to below.

Are bonds still worth holding after that?

It's a fair question after a year like 2022, and the honest answer is that there's no single right answer — it depends on what job you want your fund to do.

The case for bonds hasn't really changed. Most of the time they do behave defensively, moving far less than shares and often holding up when share markets fall. 2022 was a notable exception, not the norm — it was the simultaneous fall in both bonds and shares that made it stand out. Over a long horizon, a fund with bonds in it will generally swing less than one that's all shares.

There's also a silver lining buried in the seesaw. Once rates have risen, newly issued bonds pay those higher rates — so the income a bond fund earns going forward is higher than it was. The pain of a rate rise is felt up front in prices; the benefit is a higher running yield afterwards.

The balanced view: bonds reduce volatility but don't eliminate it, and in rare conditions they can fall alongside shares. Holding them is a trade-off, not a guarantee. What 2022 really demonstrated is that "conservative" is a description of how much a fund tends to move, not a promise that it can't move down.

How much of my fund is in bonds?

That depends entirely on which risk type you're in. Sorted's Smart Investor (run by the FMA) groups funds by how much they hold in growth assets — and the rest, broadly, sits in income assets like bonds and cash ²:

Fund type	Growth assets (shares, property)	Income assets (bonds, cash)
Defensive	0-9.9%	~90-100%
Conservative	10-34.9%	~65-90%
Balanced	35-62.9%	~37-65%
Growth	63-89.9%	~10-37%
Aggressive	90-100%	~0-10%

Growth-asset bands per Sorted Smart Investor; income-asset share is the inverse ².

So a conservative fund is mostly bonds and cash, which is exactly why it's most exposed to the rate/bond seesaw. A growth or aggressive fund holds very little in bonds, so a year like 2022 hurt it through falling share prices instead. You can look up the exact asset mix for your own fund — most providers like Booster, Milford, Simplicity, Fisher Funds, Generate and the bank schemes publish it in their quarterly fund updates, and it's all searchable on Smart Investor. If you're unsure which type you're even in, our guide to KiwiSaver fund types walks through the differences.

Do falling rates now help the bond part of my fund?

This is the other side of the seesaw, and it's been playing out. After the OCR peaked at 5.50% in May 2023, the RBNZ began cutting — bringing it down to 3.50% by April 2025 ⁴⁵. Lower rates push the prices of existing bonds up, which means the bond portion of conservative funds has been recovering ground it lost in 2022.

You can see it in the returns of a benchmark conservative fund on Smart Investor: roughly -0.66% for the year to March 2023, recovering to around +3.6% for the year to March 2025 as rates fell back ⁶. The same mechanism that hurt in 2022 has since worked in the other direction.

A couple of caveats keep this honest. Rate moves are not a one-way street — the RBNZ adjusts the OCR based on inflation and the wider economy, and rates can rise again. And falling rates don't lift a conservative fund without limit; they help the bond part, but the fund's overall return still depends on its full mix. For the bigger picture on how the OCR feeds through to your balance, see our note on the OCR and your KiwiSaver.

What this means for choosing a conservative vs growth fund

The lesson from 2022 isn't "avoid bonds" or "conservative funds are secretly risky." It's that every fund type can have a down year — and the right choice depends on your timeframe and how you'd react to a fall, not on chasing a "safe" label.

Sorted's own risk guidance makes the point well. Even the most defensive options have down years from time to time ⁷:

Fund type	Roughly how often it has a negative year
Conservative	About 1 year in 7
Balanced	About 1 year in 6
Growth	About 1 year in 5
Aggressive	About 1 year in 4

Indicative negative-year frequency per Sorted's Smart Investor risk guidance ⁷.

A few things worth weighing up:

A conservative fund is lower-volatility, not loss-proof. It moves less than a growth fund, but as 2022 showed, it can still fall — and over long periods it tends to return less than growth.
Timeframe matters more than the label. Money you'll need within a few years (a near-term first-home withdrawal, for instance) is often kept in lower-risk options so a bad year doesn't catch you at the wrong moment. Money you won't touch for decades has time to ride out the swings.
Being too conservative carries its own risk. Choosing a low-risk fund to avoid losses, when you've got 20 or 30 years until retirement, can quietly cost you a lot of growth. We cover that trap in too conservative for too long.
Understand what you're actually measuring. A single year's return — up or down — tells you very little. If you want to make sense of the numbers, our guide to KiwiSaver returns explained is a good place to start.

There's no universally "right" fund. The fund that suits a 25-year-old saving for retirement is rarely the one that suits someone planning to buy a house next year. Matching the fund to your timeframe and temperament is the part that actually matters — and it's the part a review is built to work through.

Frequently asked questions

Can a conservative KiwiSaver fund lose money? Yes. Conservative funds are mostly bonds and cash, and bonds fall in value when interest rates rise. The average conservative fund lost about 8.1% over the year to September 2022 as rates climbed ¹. Sorted's guidance suggests a conservative fund has a negative year roughly 1 year in 7 ⁷. Lower-risk means smaller swings over time, not no swings.

Why do bonds fall when interest rates rise? Because new bonds start paying the higher rate, which makes existing lower-rate bonds less attractive. Their market price drops until their return is competitive again ³. You still receive the bond's interest payments, but the price someone would pay for it today falls — and inside a KiwiSaver fund that shows up as a lower balance.

Why were 2022's losses unusual? Normally bonds hold up, or rise, when share markets fall — that's why funds hold them. In 2022 the rapid rise in interest rates dragged both bonds and shares down at the same time ¹³, so the "safe" part of conservative funds didn't cushion the fall the way it usually would.

Are bonds in my KiwiSaver recovering now? As rates have fallen from their 5.50% peak in May 2023 to 3.50% by April 2025, the bond portion of conservative funds has benefited, because falling rates push existing bond prices up ⁴⁵. A benchmark conservative fund went from about -0.66% (year to March 2023) to roughly +3.6% (year to March 2025) ⁶. Returns aren't guaranteed and rates can rise again.

How do I find out how much of my fund is in bonds? Look up your fund on Sorted's Smart Investor, or check your provider's latest quarterly fund update — both show the split between growth assets and income assets. As a rough guide, conservative funds hold around 65-90% in income assets like bonds and cash, while growth and aggressive funds hold very little ².

Should I switch out of a conservative fund because it can fall? Not automatically. Every fund type can have a down year ⁷, and switching after a fall risks locking in a loss. The better question is whether your fund matches your timeframe and how you'd cope with a fall — which is exactly what a review is for. This is general information, not advice about your situation.

Surprised your "safe" fund fell in 2022? A free KiwiSaver review with a Smiths Financial adviser can talk through whether your fund still matches your timeframe. Book a review

General information, not personalised financial advice. It does not take into account your particular financial situation, goals or needs — consider whether it's right for you and seek advice tailored to your circumstances before acting. KiwiSaver is a long-term savings scheme; government contributions, contribution rates, withdrawal rules and tax (PIR) settings are set by the Government and can change. Returns are not guaranteed — the value of investments can go down as well as up and you may get back less than you invested; past performance is not a reliable indicator of future performance. Figures are correct as at 27 April 2025; check current rules at ird.govt.nz, kiwisaver.govt.nz and sorted.org.nz, and the relevant scheme's Product Disclosure Statement. Craig Smith Business Services Ltd (FSP712931), trading as Smiths Financial, holds a Class 2 licence issued by the Financial Markets Authority and is a member of the Financial Dispute Resolution Service (FDRS). Written by Henry Smith, Financial Adviser; reviewed by Craig Smith, Principal Adviser. Last reviewed 27 April 2025.

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