Exactly one year ago, the average fixed deposit (FD) rates of local banks were around 1.6%. Today, the average rate is at 0.4%. That is a substantial 75% reduction.
This is a true rude awakening to the people who often put their money in fixed deposits on a yearly basis, hoping for better renewal rates every year.
For those who don’t know what fixed deposits are and how they work, here’s an explanation:
A fixed deposit (also known as timed deposit) is a type of investment that guarantees a fixed interest over a certain period of time, usually a year based on per annum rates. It is considered a very safe investment, as there is absolutely no risk to the principal amount. After the tenure of the fixed deposit, the full capital amount along with the fixed interest earned will be given back to the investor. In the event of a premature withdrawal, the only penalty the investor faces is the reduction in interest payment, depending on the time left till tenure ends.
Usually banks and financial institutions offer fixed deposits over the counter. Fixed deposit rates different between amounts and different institutions. There is usually a minimum amount, but no prior investment knowledge or customer knowledge assessment (CKA) is needed.
Thus, putting money in a FD will get you more interest as compared to a normal bank account which offers only 0.05%.
However, every investor knows the basic law of investing: high risk, high return. For the low risk taken in a FD, the investor is compensated with a low return.
Here’s an infographic on Investment Risk and the respective investment types (user to exercise discretion on investment time horizon):
With a significant reduction in FD rates this year, which level should cautious investors head?
Despite having lower risk appetite, cautious investors should still try to move up the investment risk pyramid, because putting savings in a deposit account with low interest rates actually erodes the value of money over time, due to inflation.
If you’re a cautious investor, do check out this month’s Singapore Savings Bond. No customer knowledge assessment or pre-requisites required as it can be purchased via an ATM.
For mutual funds or unit trusts, you can head over to Fundsupermart.com if you haven’t heard of them before. They charge the lowest or sometimes even 0% commission for funds purchased.
If you’re an avid stock investor, head over to InvestingNote and you’d start to see which stocks everyone is talking about for this year.
Finally, as champions of financial and investment literacy, we wish everyone reading this blog a Happy New Year and better investing decisions & outcomes to come!