A Safe and Secure Investment Strategy for Fixed Deposits
Fixed Deposits or Time Deposits are fixed interest savings products offered by almost all banks in Malaysia. Fixed deposits offer significantly higher rates of interest than savings accounts while minimizing the risk associated with other high-risk investment products; this accounts for their popularity with Malaysians even today. Here are a few tips that will ensure you a safe and secure strategy while investing in fixed deposits:
Understand your requirements – Try understanding your exact needs/requirements through the following questions:
▪ What is your invest-able corpus? This is the amount that you can set aside.
▪ What is your invest-able tenor? This is the period for which you invest in an FD.
▪ What is your risk profile? Are you willing to invest in market-linked FDs? Or do you want a safe, guaranteed-return FD?
A fixed deposit involves depositing a sum of money for a fixed period of time ranging from a month to a few years. Premature withdrawals (before end of tenor) could potentially lose you all the interest earned as well as making you liable to pay a penalty (depending upon the product’s terms and conditions). So, check whether you can (i) set aside an invest-able corpus and (ii) for the given time period.
Learn about the different FD products on offer – These could be:
Conventional Fixed Deposits
They offer a guaranteed rate of return, the quantum of which is based on the tenor of investment. The tenor may vary from 1 month to 60 months depending upon the issuing bank and the particular product. Terms and Conditions relating to minimum deposit amount, tenor, premature withdrawal, gifts, partial withdrawal, periodicity of interest payments etc vary from bank to bank.
Foreign Currency Fixed Deposits
These accounts allow you to open deposits in a range of foreign currencies. You can open them in Ringgit which are then converted into units of the foreign currency of your choice. These deposits have become popular since the liberalization of the Foreign Exchange Administrative Rules on the 01st of April 2005.
Islamic Fixed Deposits
Mudharabah, Murabahah and Wakalah are the main types of fixed deposit options available under Islamic Banking. The customer deposits his money with the bank for a fixed duration. The bank will invest the monies so deposited in Shariah-compliant ventures and the proceeds are divided, between the investor and the bank in it’s capacity as a manager, at a pre-agreed ratio.
Junior / Senior FDs – Many banks provide Fixed Deposit products targeted at the children’s and seniors’ categories. These deposits carry a higher rate of interest than on standard deposits.
Cooperative bank deposits – Cooperative deposits enjoy the reputation of providing some of the best FD returns in the market and for short tenors as well. For instance, the Term Deposit Account-i from Bank Rakyat provides a return of 3.7% for a period of 3 months. And, the minimum deposit requirement is just RM500. But, remember that cooperative bank deposits do not enjoy PIDM protection.
Step-up fixed deposits – These fixed deposits split the deposit tenor into periods and offer different rates of interest for each period. The interest rate offered during successive periods becomes higher till it reaches the highest interest return / advertised rate during the final period. Standard Chartered Bank is an example of a bank that offers such deposits.
Moreover, banks issue fixed deposit products with their own “tweaks”. For instance, the AmBank Interest Plus is a short term investment that is a combination of a fixed deposit and unit trust investment. And, PIDM protection is applicable only for the FD component of the product. Make sure that you thoroughly understand the pros and cons of such products before investing in them.
Here are a few strategic tips
▪ Foreign Currency Deposits have become popular as they tend to provide higher returns than conventional deposits and in foreign currency but are subject to exchange risk. They are also popular with those who have foreign currency earnings, wish to invest overseas, have business interests outside Malaysia and/or wish to educate their children overseas.
▪ Foreign Currency Deposits also serve as a hedging tool.
▪ There are FD products that permit partial withdrawals before maturity. Citibank Time Deposit and CIMB’s Unfixed Deposit are examples.
▪ Automatic renewal is another feature that makes FD management so much easier. Search for an FD that gets automatically renewed at maturity. Or, an FD that pays the profit/interest to your current or savings account while the principal gets renewed.
▪ You could also get an overdraft facility collateralized against the fixed deposit.
▪ Fixed deposits provide higher rates of return when the funds are parked for longer periods.
▪ Many banks keep coming up with FD promotions; stay alert for such promotions as you may end up with higher interest rates than normal or with gifts that are “value-for-money”. Watch out for such promotions but also remember to go through the fine print thoroughly.
▪ Ensure that your Fixed Deposit investment is eligible for PIDM protection. This protection extends to all types of bank fixed deposits up to a limit of RM250,000 per depositor per member bank. If your invest-able corpus is more than this amount, you can still get PIDM protection for the entire sum by breaking up the sum under different accounts like joint accounts with your mother, father or spouse. Under PIDM rules such joint accounts are also eligible for separate protection up to RM 250,000 each provided that each of the joint accounts has a different set of account holders.
▪ You could also try parking some of your surplus funds in FD accounts in your children’s or parent’s names.