In its heyday, a fixed deposit (or time deposit) was quite the dude. Ask your parents. They may reminisce about a generation before them that retired on the 10% interest they earned from fixed deposits.
But like an ageing rockstar, the fixed deposit’s appeal has waned over the years as newer and fitter financial instruments promising more value for the dollar hit the market. So that must mean curtains for the good old fixed deposit, right? Not quite.
Yes, we know about their measly interest rates but if the global economic slowdown of the past is any indication, sometimes a slow and steady tortoise approach might not be a bad idea at all.
Thinking of investing in a fixed deposit? Here are some key points to chew on before you take the plunge.
1. What is a fixed deposit?
A fixed deposit is an investment where you lock-in a sum for a certain period of time and it earns you an annual interest on your deposit. At the end of the tenure, you will receive your lump sum plus interest, making it an attractive alternative to just ‘stashing’ your cash somewhere.
2. How does it work?
The minimum deposit amount could be anything from S$1000 to S$10,000 depending on the bank.
Don’t want your money tied up in case of an emergency? You can opt for a short-fixed deposit tenure from one month to a year.
12 to 36 months, that’s the most common long-term fixed deposit here in Singapore. Banks usually offer better rates for long-term deposits.
3. What is the rate of return like?
With fixed deposits, it pays to keep an eye out for promotions run by banks. An example of this is an offer by CIMB Bank where you can get an interest of 1.84% if you make a S$10,000 placement online for a 12-month term. Here are some attractive fixed deposit schemes being offered at present.
RATE OF INTEREST (% per annum)
|HL Bank||S$50,000||18 months||1.75|
|Maybank||S$1000 to S$50,000||36 months||1.80|
*Rates as of September 2018. They may be part of limited time promotions.
4. How much of my savings should be in fixed deposits?
Your age plays a major factor in making this decision. Some people swear by the ‘100 minus your age rule’ when it comes to deciding their portfolio mix. Say you are 40, the rule says you can expose about 60% of your investment to stocks and let the rest remain in low to no risk avenues like fixed deposits and bonds. That way, the older you get, the less is your exposure to market risks.
5. Why do people put their money in fixed deposits?
Lower portfolio risk
You must have heard of the golden rule of investing – don’t put all your eggs in the same basket. Every balanced portfolio needs a low-risk component. By putting a certain sum into your fixed deposit, you are assured of its safety in case your high risk, high return investments don’t work out for you.
No effect of external turmoil
You do not need to worry about any market fluctuations with a fixed deposit. At worst, if your bank is on the verge of a collapse, your deposit is safe up to S$50,000 under the Singapore Deposit Insurance Corporation guidelines.
Regular cash flow
With a fixed deposit, you are guaranteed to receive your interest every single time, no matter what.
It’s not ideal but if there is a sudden financial need, you can break the deposit and get your money back. The only downside here is you may get little to no interest and may have to pay a breakage penalty too.
6. Fixed deposit vs Singapore Savings Bonds (SSBs). What’s the difference?
Singapore Savings Bonds
|Flexibility||If you have locked-in your money into a fixed deposit for a ten-year tenure and need to withdraw it before maturity, you will lose all your accrued interest.||If you sell your SSB before the maturity date, you will still get back your accrued interest.|
|Interest Rates||Depending on the deposit amount and tenure, fixed deposits may offer you between 0.10 % to 1.8% interest per annum.||SSBs can net you anything from 2% to 3% for a ten-year tenure. Here, you will be paid interest in the form of coupons.|
|Tax||With a qualified bank, you can get a tax relief on the interest earned. If the bank is non-approved, the interest is taxable.||You don’t have to pay any tax.|