You’re not the only one who has often been advised to invest in a fixed deposit by your parent or a concerned colleague. You might’ve taken their advice seriously too, but lack of clear understanding has somehow stopped you from going further.
And your hesitation is understandable. FDs, like any other investment instrument, must be understood in full before you finally take the plunge.
And that’s what we’re here for.
We present a simple beginner’s guide to fixed deposits, and also provide some useful pro-tips towards the end of the blog. So read on, and take an informed decision.
Let’s start with an infographic
What is a fixed deposit?
Fixed deposits, or commonly known as “FDs”, are a popular and secured investment instrument in which a depositor invests a pre-decided sum of money for a fixed tenure for which the bank pays a particular amount of interest to the depositor. All FD products have their own minimum and maximum investment requirements, and every depositor must adhere to them.
The depositor can choose to withdraw the principal along with the interest earned at the end of the investment tenure (when the deposit matures), or reinvest the full amount (principal + interest earned) or only the principal amount by renewing the investment.
FD tenures generally vary anywhere between 1 month to 5 years (with different interest rates for different tenures), and the interest is paid only at the end of the tenure when the deposit matures. You rather not withdraw any amount before the FD tenure ends, as doing so will involve paying a penalty, and more importantly, a loss of potential interest earning.
As such, you’ll be well-advised to go for a fixed deposit only if you can afford to keep the deposit amount “out of bounds” during the FD tenure.
Fixed deposits are popular mainly because they’re regarded as a low-risk and safe investment tool which fetches higher interest than a normal savings account.
So, what are the different types of fixed deposits?
There are various types of fixed deposits offered by different banks in Malaysia. They can broadly be differentiated into three categories. Choose the one that best suits your financial goals.
Based on the banking principle:
Conventional fixed deposits: In a conventional FD, the depositor earns a guaranteed interest upon the maturity of the deposit. The interest rates (generally 3-4%) differ according to the duration of the deposit (from 1 month to 5 years) and the product.
Islamic fixed deposits: Islamic FDs strictly adhere to the Shariah principle according to which ‘riba’ (interest) is prohibited. Instead, the profit rate is based on the performance of the Islamic bank and thus varies from month to month. In fact, an Islamic bank will invest the deposits in Shariah-compliant ventures and will share the profit (or the loss, which is unlikely) in a predetermined profit sharing ratio with the depositor. Click here to know more.
Based on FD tenures
Short-term FDs: A short-term FD is one where the investor deposits money for shorter durations, ranging from 1 month to 6 months — a perfect option for those who don’t want their funds to remain inaccessible for years, simultaneously earning guaranteed interest.
Long-term FDs: A long-term FD, on the other hand, is a longer investment commitment as the tenure ranges from 1 year to 5 years. Needless to say, the depositor’s fund remains inaccessible for a longer time in a long-term FD but fetches more interest than a savings account. Long-term FDs are quite popular mainly because setting aside a particular fund prevents it from getting spent and gives it ample time to grow to achieve long-term financial goals, like arranging downpayment for a new home.
Based on interest rate calculation
FDs with a fixed rate of interest: Such fixed deposits have a fixed rate of interest throughout the tenure of the investment.
Step-up FDs: The interest rates keeps rising as the FD tenure progresses in step-up fixed deposit products.
So now that you have a fair idea of what is a fixed deposit and how FD products vary from each other, let’s dig deeper on some of its major pros and cons.
- All FDs — both conventional and Islamic — are regarded as a secure and low-risk investment instrument as they are protected by the Perbadanan Insurans Deposit Malaysia (PIDM) to up to a maximum amount of RM250,000 in the unlikely event of the provider bank collapsing.
- They generally fetch higher interest/profit rates than a normal savings account.
- There’s complete clarity on exactly how much amount can be withdrawn at maturity.
- Their tenures vary from 1 month to 5 years giving depositors ample flexibility for their investments.
- They help to achieve your savings goals by preventing a considerable amount from getting spent.
- FDs act as a useful collateral when a depositor seeks a loan.
- Most FD accounts can be renewed for further investments.
- Generally, the FD amount remains inaccessible during the course of the investment tenure, so it can’t be of much help if one needs it urgently for an emergency situation. They can be withdrawn prematurely, but only after paying a considerable penalty and losing potential interest benefits.
- Although FDs generally fetch higher interest than savings accounts, still the returns are lesser than more lucrative (and riskier) investment tools like equity-linked funds and stocks.
- FDs involve a one-time deposit followed by a long waiting period, which at times puts off aggressive investors (like stock investors) who prefer managing their investments with a more hands-on approach.
Now that you’ve understood the basic pros and cons of fixed deposits, here are some pro-tips:
- Don’t forget to check those temporary promotional offers: Many banks offer temporary FD promotions with higher interest rates (or other perks like lucky draw entry) for their particular products. You can further ramp up your returns by taking advantage of these promotions. Click here for 5 ongoing FD promotions that can maximise the returns without increasing the risk factor.
- FDs can build the foundation of your total investment portfolio: Weighing both the pros and cons, it can be safely argued that a fixed deposit can become an essential component of your total investment portfolio. The key is to offset combined risk and fetch good returns by diversifying your investments and putting some money in a combination of low-risk (but low returns) and high-risk (but higher returns) investment instruments. The low-risk (read safer) nature of FDs will garner guaranteed returns that will be more than the same amount sitting idle in a savings account. Plus FD returns also give more confidence to investors to invest in riskier tools like stocks. At the same time, they are a perfect option for investors with low-risk appetite.
- Good for seniors as well: Many banks offer special (read higher) interest rates for senior citizens, as such it often becomes the preferred investment tool for the elderlies.
- Take advantage of foreign currency FDs: Many banks in Malaysia also offer foreign currency FDs, which can be a good option if your fund is comprised of currencies like Australian Dollars, US Dollars, British Pound, Singapore Dollars, Euros, etc.
In conclusion, we would like to say that you must aim to invest to grow your wealth and achieve your financial goals, and the safe fixed deposits can be a good option. Don’t forget to compare the different FD products offered by banks before finally settling for the one that best suits your interests.
Here’s wishing you great returns!
You may also like some of our other personal finance blogs:
- 10 Signs You’re Bad with Money, and Simple Solutions to Fix the Problems
- 10 Financial Milestones to Achieve by Age 35
- 4 Wise Things to Do with Your Salary