Should You Get a Fixed Deposit?

A fixed deposit is a sum of money you place in a bank account for a fixed time period in order to receive a fixed interest rate in return. It’s called ‘fixed’ because you agree to leave your money in the account for the full tenure of the fixed deposit. As long as you do not withdraw your money, the interest rate is fixed. Unlike some other investments, you’re technically still able to take your money out of fixed deposits, but as a result, you might not receive any interest or if you do, it’ll be less than what the bank had initially agreed.

1. Fixed Deposits are a safe investment

   Fixed Deposits (FD’s) are a safe place to leave your money. Compared to other investment products, putting your savings in FDs pre-determine your returns and you can have your initial capital guaranteed.

2. FDs are suitable for short to medium term investments

   Fixed deposits are not a good option for long term investments (> 5 years) as there are other investment products that will give you a better return. It’s best if you use fixed deposits for your short to medium term/ emergency savings (between 0-5 years).

If you don’t have the time or necessary financial knowledge to invest in other products. Putting your money in investments such as stocks and unit trusts requires a lot of research. Also unlike unit trusts or stocks, FDs let you achieve (moderate) capital guaranteed returns.

If you fear making a loss. FDs are effectively risk free as your capital is guaranteed for amounts up to RM250,000. With FDs you know exactly what your returns and investment timeframe will look like beforehand unlike investing in the stock market.

If you want to be assured of your returns. You don’t have to worry about your money because you know exactly how much you’ll get when you put your money in FD.  While this might potentially be lower than the returns you’d earn investing in the stock market, at least you know exactly what you’ll earn. 

If you want to be able to access your money easily. As compared to other investment products, fixed deposits are very liquid. This means that you can access your cash almost instantly in case of emergencies or for your immediate spending needs. Do note that you may forfeit some or all of your interest if you do break your FD early. So please be aware of any conditions for withdrawal that the bank has imposed to avoid losing out on your interest payments.

And, when you compare FD returns to savings accounts. Fixed deposits offer better rates but you’ve got to leave your money alone for the length of time you’ve chosen.

You’re going to want to have some money in FD for emergencies and for planned events (housing expenses, education payments, etc. ) but you probably don’t want to save long term using FDs. 

If you’re looking for ways to grow your capital in the long run you should consider saving your money elsewhere in financial instruments such as Amanah Saham, Exchange Traded Funds (ETFs) or putting more money into your Employee Provident Fund (EPF) account instead.

As an investor, there are other options that are still safe, that could potentially earn you more interest such as EPF. If we compare the FD rate to the rate you’d get if you had put your money in EPF, the difference in how much you make would be pretty large. In the below graph we show you the difference if you had invested RM1,000 in a 12 month term FD being rolled over compared to EPF. 

After 10 years, the difference in your returns is RM 472

After 20 years, the difference in your returns is RM 1,493

And after 30 years, it is a shocking RM 3,565!

Note: 

Though we compare saving in an FD to EPF, putting more money to your EPF account isn’t as straightforward as opening an FD. Still, you have a few options for contributing more than the statutory amount to your EPF:

• Voluntary contributions: This is an option those of you that don’t currently contribute to EPF as well as for those of you that would like to contribute to the retirement savings of your loved ones. Annual contributions are capped at RM60,000 and depending on your situation you may be able to receive additional government contributions to your savings as well. Check this link out to learn more (https://www.kwsp.gov.my/member/contribution)

• Contributing for more than the statutory rate: This option is for those of us that already contribute to our EPF but would like to do more. Both you or your employer can opt to increase the rate at which the both of you are contributing towards your EPF savings. This new rate would then apply to all subsequent EPF contributions you or your employer makes. Check this link out to learn more (https://www.kwsp.gov.my/member/contribution/contributing-more-than-the-statutory-rate)

• Also since your EPF savings are meant for retirement, there are restrictions on when you can access that money. You wouldn’t have full use of that money until you were to retire. This makes it a much longer-term investment than FDs 

For details on the chart, click here.

Assumptions