Fixed Deposits (FDs) or Term Deposits have long been a standard form of investment for many. Available in both conventional and Islamic formats, fixed deposits, unlike stocks and unit trusts, don’t offer the greatest of returns. But what they lack in profitability, they make up for in safety and ease.
These investments do not need you to be too involved or hands-on. You literally have to just sit and wait for the deposit to mature.
A lot of us still find ourselves asking a bunch of questions on the topic. That is by no means a bad thing. We certainly don’t advise you to put your hard earned money into any investments without understanding what you’re doing. This article aims to answer some of the most common and basic questions everyone has and should have when it comes to fixed deposits.
1. Is it a worthy investment?
Although this is a common question, it is also subjective and loaded. When comparing fixed deposits to other investments such as stocks and mutual funds, the interest rate you get is low, but the risk factor is next to nothing.
Not everyone can have the same success that Warren Buffet enjoys. Events that affect stock markets hardly ever make a difference to fixed deposits. Even in the unlikely event that the bank does collapse, your deposit is still guaranteed by the government, albeit to a certain amount. Fixed deposits are a good addition to any portfolio as they help to diversify your investments and decrease risk.
2. Are they better than a savings account?
Again, a very subjective yet common question to which the answer is both, yes and no. Yes, because the deposit offers you much better interest rates than a savings account. No, because you can’t access it as easily as you could your savings account.
If you have a separate emergency fund, you should be careful about putting the money in a fixed deposit. Fixed deposits are less liquid than money in your regular savings accounts or money invested in bonds. Which means that if an emergency occurs, you don’t want to have to withdraw your fixed deposit before it matures, resulting in a loss in returns.
3. Is it available to foreigners?
Yes. There are plenty of fixed deposits in Malaysia that are open to Malaysian Citizens, Permanent Residents, and to foreign applicants. Fixed deposit accounts offered by CIMB are a prime example.
Foreign applicants could also apply for Foreign Currency Fixed Deposits. These deposits are usually available for tenures of up to 12 months. Investing in such deposits allows you to hedge against inflation and keep the currency in the account until the exchange rate is more suitable.
4. Is it suitable for retirement?
While fixed deposits are great for bolstering any investment portfolio, relying solely on them for retirement wouldn’t be the best idea. They do offer security and a guaranteed rate of return. However, the returns itself do not amount to much when compared to other retirement schemes.
There are plenty of retirement schemes available in the market and those looking to start a retirement savings fund should reach out to a financial adviser or investment adviser for better guidance. Many insurance providers offer retirement plans that help you accumulate a sufficient nest egg for retirement.
5. Is there any added advantage to having a fixed deposit?
Yes. Apart from the fact that it is one of the safest forms of investment, it helps in diversifying your portfolio and softens any impact that underperforming assets might have.
Not only does an FD stabilise your investments, but it also acts as an instrument of credit. Many banks offer you personal lines of credit, overdraft facilities and even credit cards when you put up your fixed deposit amount as collateral.
6. How much money will I have to deposit?
Fixed deposits require a minimum deposit amount, but this usually depends on the tenure you choose. Tenures of 1 month have a higher requirement, though tenures above 2 months are more affordable.
For example, the Maybank Fixed Deposit Account has a minimum deposit requirement of RM5,000 when you choose a tenure of 1 month. For tenures of 2 months or more, your minimum deposit amount drops down to RM1,000.
Apart from what you can afford, you should also look into what you can set aside. There’s no point dumping all your cash in a fixed deposit account and leaving yourself vulnerable to unforeseen expenses. You need to have a certain level of liquidity to meet your daily requirements.
7. How safe is it?
Very. Most of us know that our deposits are insured by PIDM for up to RM250,000 in case the bank fails. But what’s interesting is that you can have a cover of RM250,000 per account per bank that you deposit in. Even when depositing with the same bank, you can get an insurance cover of RM250,000 each if you have these distinct types of accounts: conventional FD, Islamic term deposit, joint-name accounts, trust accounts, and sole proprietor accounts.
PIDM also insures deposits for Malaysians and non-Malaysians alike. So regardless of whether you’re a Malaysian or an expat or a Permanent Resident, you still have your deposits insured.
8. What happens when an FD matures?
Depending on the fixed deposit account you have chosen, you may either have the deposit and interest credited to you or you could have it automatically renewed. Maybank and CIMB both offer eFixed Deposits that have automatic renewals.
Some deposits give you the option of automatically renewing your initial deposit amount and withdraw the interest earned, or you could choose to renew the deposit plus the earned interest.
Do keep in mind that automatic renewals may not necessarily enjoy the same rates of interest. You should make it a point to properly compare the various fixed deposit accounts available to see which offers the best rate, before opting for the renewal.
9. What happens when I need to withdraw it?
With life being as unpredictable as is, there will be times when you need to withdraw your fixed deposit to meet some other unforeseen expense. Some deposits allow you to make premature withdrawals. Fixed deposits offered by Maybank and Alliance Bank allow you to make partial withdrawals. Depending on how early in the tenure you make the withdrawal, you can either get some interest or no interest at all.
Term deposits are a great investment tool for beginner investors and seasoned veterans alike. You simply have to put the amount in and wait for it to mature.
Settling on the right amount, the right tenure, and above all, doing the research and choosing an account offering the highest rate of interest will ensure that you make the most out of your investments.
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