[MONEY] FD/TD over Investments

If you are still pondering whether to throw in a lump sum into investments (eg. bonds, equities, funds or insurances), you probably fear the loss of your principal sum, the attractive "projected" interest rates that fluctuates and non-guaranteed or the long-term commitment (not necessary applicable to all investment options) that is required to see profits. Fear not, a good investment portfolio tailored to your needs is what you need to get you started and make your dollar work harder.

However, if you are still a rather traditionally conservative saver, who believes in earning your keep and keeping your earnings, a savings account is the best place for that, but not exactly the best place to let your money grow. Presently, savings accounts carry a fluctuating interest rate of around 0.2750% p.a. (as of today at XYZ Bank) (calulated and credited on a monthly basis), a safe and comfort zone for your money, where they aren't working hard to make profits/returns for you.

You are better off putting your money in an FD (Fixed Deposit) or TD (Time Deposit), both refers to the same thing. In an FD/TD, you will put your money with a bank, for a specified period of time. An FD/TD will allow your money to work slightly harder and earn you interest rates of about 0.825% p.a. over a duration such as 12 months (as of today at XYZ Bank). During this period of 12 months, you are advised not withdraw this FD/TD. The interest earned will then be paid at the end of the 12-month tenure. This interest rate is fixed at the moment you start your FD/TD to the end of tenure, despite any changes to the rates along the way. However, should you decide to withdraw this FD/TD, which can only be done in full and not in part, you will forfeit on your interest. Since the interest is only calculated and paid at the end of the tenure. There is usually no penalty on your principal sum. It is also not possible to add money to an existing FD/TD. The tenure periods vary from 1 month to 24 months and sometimes longer. The same principle applies such that that interest will be paid at the end of the tenure. Nevertheless, some promotional FD/TDs offer cash or credit payout during the tenure, which the latter is prefered in order to benefit from compounding interest. Usually the more and longer you deposit, the better the interest rate. So people can usually ignore any tenure below 12 months, unless there are promotional FD/TDs which will appear every now and then, offering much higher interest rates such as above 2%.

What are the benefits of FD/TD over investment?

• The principal sum is protected in FD/TD, while it is possible to incur a loss in some investments.
• The interest is guaranteed based on a fixed interest rate in FD/TD, while all investments usually illustrate a non-guaranteed "projected" interest/return rate at the point-of-sale, which is not fixed and can fluctuate higher or lower.
• The interest rate is "protected" during tenure for FD/TD.
  In order to illustrate this point, take for example a promotional FD/TD offers 2.5% p.a. interest for tenures of 12 months and 18 months. Mr. X picks up an 18-month tenure and Mr. Y picks up the 12-month tenure on the same day, both putting $1000.
  At the end of 12 months, Mr. Y receives his principal sum+2.5% p.a. of interest (S$1,000+S$25=S$1,025). He realised that he got no urgent use of that money and then looks for another place to put his money into, only to discover there are no promotions and standard FD/TD interest rate for a 6-month tenure is just 0.57%. Mr. Y decided that it is better to put that money in the FD/TD than putting it back in the savings account where interest rate is even lower. At the end of his 6-month tenure, he receives his principal sum+0.285% interest (0.57% p.a. of interest pro-rated to 6 months)(S$1,025+S$1,025x0.57%x6/12=S$1,027.92). For this period of 18 months, he earned at total of S$27.92.
  Mr. X, at the same time, the end of his 18-month tenure, receives his principal sum+3.75% of interest (2.5% p.a. of interested calculated to 18-months)(S$1,000+S$1,000x2.5%x18/12=S$1,037.50), earning S$37.50, more than Mr. Y by S$9.58. If the difference seems small, imagine the principal sum is S$10,000, the difference will be S$95.80.
  You can see how Mr. X has benefitted from his "protected" interest rate.
• There is no transaction charges in FD/TD while in most investments, each transaction (buy/sell) has a charge incurred.

The downsides of an FD/TD are:

• The "protected" interest rate can mean that should better interest rate go up during the tenure, one cannot benefit from it. It is therefore important to know what rates are good for a longer tenure.
  With referance to the above example, should Mr. Y find another promotion FD/TD at 2.9% p.a., he would have earned S$39.86, which is more than Mr. X.
• The money is "locked-out" and should not be touched, since any pre-mature withdrawal means zero interest, even if it is on the 23rd month of a 24-month tenure, keeping in mind that your money could have worked for you at a slower rate instead, in shorter tenures. Therefore, one must know when he will be needing the money.
• Less attractive interested rate/returns compared to investments. On the contrary, despite non-guaranteed interest rates in investments, a balanced portfolio and prudent choices can easily fetch a better return. Keeping in mind that it is like a gamble, the rate can go up or tumble and sometime even incurring losses on the principal sum.

If you happen to be putting an FD/TD in a bank where you have an existing savings account, the FD/TD will have a separate account number. Most of the time, an FD/TD requires "fresh" funds, meaning that the money cannot be transferred from any of your existing accounts from the same bank. Hence, you will most likely need to withdraw your money from accounts of another bank.

Tips to withdraw a lump sum
In order to withdraw a lump sum (eg. S$5,000 or more) , it is not possible to withdraw cash via the ATM, since is probably beyond your daily withdrawal limit on the ATM (automated teller machine), unless you withdraw to your daily limits, over a few days. Otherwise, you will need to withdraw it physically over the teller in the bank, which you can then opt for cash in notes or cheque. I am certain not many would like to carry around a stash of attention-seeking notes, hence a cheque (or aka cashier's order) can be issued to your own name. A cheque issued to your own name is free-of-charge and crossed to be paid only to payee (yourself), which is also necessary for starting a new FD/TD account in another bank.

Now that you have a lump sum of money in hand, you can then visit the bank to do a fixed deposit/timed deposit. Note that apart from banks, there are a few Finance companies (e.g. Singapura Finance) and Insurance companies (e.g. AVIVA), that offer regular savings and FD/TDs as well. These Finance companies are registered under the Monetary Association of Singapore (MAS), which is part of the Singapore Goverment. The Finance companies are closely monitored to ensure the benefits of the people of Singapore, so your worries of them running away with your money is not necessary. The main difference between a Finance company and a bank, in simple terms, is the amount of capital that they operate on. On the other hand, Insurance companies usually offers investment-linked savings with an insurance plan tied to it, since as an insurance company, they must sell an insurance product. In such products, the premium paid is mainly split into two portions, one part for investment/savings and another part for insurance. The weightage can sometimes be decided by the buyer, though usually managed by the Insurance companies.

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At the end of the day, I hope that you have a clearer picture of deciding FD/TD and where to place your money wisely. The most important thing is to make sure that you have sufficient liquidities in your regular savings account for day-to-day use and any short-term commitments that you may/may not expect; have a few investments in hand, such that you are making your money work harder for you.
Do keep a look out when I bring you more information on managing the dollar. Meanwhile, if you have any information to add, please feel free to email me or make comments here. After all, I am no expert but sharing what I learn and know.

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Singapore Money Finance Fixed Deposit Timed Deposit