Safe haven in fixed deposit


INDIVIDUALS are generally spoilt for choice when it comes to investing. There are many ways and products that can be used that would lead to capital appreciation.

But many people still feel more comfortable putting their money in fixed-deposit (FD) accounts because it feels like a safe haven to them, a surety even, that their “safe” monies will see growth over the short to mid-term period.

Why would investors choose to keep their money in FD accounts as opposed to other financial instruments, or even dabble in the share market where the capital gains are potentially exponentially higher?

Licensed financial adviser and syariah financial advisory for Excellentte Consultancy, Jeremy Tan, says it is because people feel that banks provide safety in the returns.

“FDs are like a guaranteed, and people feel safe because their returns are guaranteed by the bank. Also, if anything does happen to the bank, they are insured up to RM250,000,” he tells StarBizWeek.

However, should the bank fail, an investor that has more than the insured amount in their account will risk losing the remainder.

“The risk FDs have is if the banks close down. They may not get their dollar for dollar back,” says MyFP Services Sdn Bhd managing director Robert Foo.

Meanwhile, Tan says: “In terms of safety of returns, the risks are zero, unless the whole economy collapses but I don’t think Malaysia is heading in that direction.”

According to iMoney chief executive officer and co-founder Ching Wei Lee, placing money in a FD account is one of the safest forms of investment.

“Not everyone is willing to risk their money on stocks, properties or other similarly risky investments. For one, the learning curve is steeper: there is a lot to learn if you want to be a professional stock investor.

“On the other hand, a fixed deposit gives you the chance to just sit back and wait for your returns,” he says on Lawyerment, a web portal that provides self-help legal guides for individuals and businesses.

Ching notes that most financial institutions that offer fixed deposits are credible, stable and regulated by government agencies.

“Fixed deposits in Malaysia are also protected by Perbadanan Insurans Deposit Malaysia (PIDM), which is a Government agency established to protect Malaysians against the loss of their deposits placed with banks in the unlikely event of a bank failure.”

Tan adds that the profile of the likely investor that would keep his money in FD is usually risk averse, retired, or in their mid 40s to 50s prior to retiring.

While there are many other financial instruments that investors can use to grow their net worth, FDs can act as a tool to complement their portfolio.

Foo adds that FDs should be used as a relatively safe asset as well as for its liquidity. It does, however, give lower returns compared with financial assets or the equity market.

Additionally, local banks are currently racing to increase their stash of deposits in tandem with concerns over rising loan-to-deposit ratios, hence are offering more attractive rates.

Banks have taken Bank Negara’s move to raise overnight rate policy (OPR) on July 14, as a cue to gradually inch up their FD rates.

CIMB Group Bhd, the second largest lender, had fixed its FD rates at 3.4% for a 12-month tenure in mid-July from 3.15% previously.

Among the other banks, CIMB’s FD rate is the highest, with Public Bank Bhd trailing slightly behind with 3.35% for the 12-month tenure period.

Malayan Banking Bhd’s 12-month deposit rate per annum is 3.3%.

It is also quite common for investors to spread their FDs over four to five banks, in efforts to diversify their risks and returns from each bank.

Foo adds that there is still a level of fear and ignorance among investors, especially for those who rely solely on capital appreciation from FDs.

“This means that their whole net worth is not growing optimally, hence their financial balance sheet is not efficient,” he says.

If investors find that they are not achieving the returns they seek, he advice them to reallocate their investments that perhaps involve moving their liquid assets into other asset classes.

“This is to ensure their personal wealth balance sheet is in optimal position to achieve the goals they want,” says Foo.

Tan feels that people need more education and consider the official inflation rate as well as real inflation rate when putting their money in FDs.

Real inflation rate is typically higher as it takes into account the lifestyle of an investor.

Compared to the official inflation rate, which slowed to 3.2% in July, putting their money in FD could possibly result in negative returns.

In July, inflation rate slowed to 3.2% from 3.3% in June, driven by lower food and transport cost and falling clothing prices.

However, economists are gearing up for higher inflation rates next year, with the introduction of the goods and services tax as well as further subsidy rationalisation.

“Although moderating, short-term inflation outlook is still on the upside, especially given the Government’s commitment for further subsidy rationalisation policies either through the trimming of fuel subsidies or via a new mechanism of tiered subsidy provision.

“If the policy materialises, consumer prices may likely pick up again,” said Alliance Research economist Manokaran Mottain in an earlier report.

Alliance Research expects inflation rate for 2014 will be 3.5%, a “fairly manageable” level. Although in the first half, the country registered a 6.3% growth, the research house does not expect Bank Negara to further raise the OPR this year.

“That’s why people need to diversify and build a portfolio so they can also take a bit of risk to achieve greater returns, above real inflation. This is so that their money will grow instead of shrink,” says Tan.

Like any other imperfect investments in this world, FD also have some disadvantages that often cause people to pass them over, Ching points out.

“The trade-off is that they are also one of the lowest profit-generating investments. Wise investment experts would tell you though that the elimination of risk in FD is quite worthwhile.

“In addition, when it comes to FD, you should not be looking at solely the monetary value of your returns. Instead, you should also take into account the intangible benefits in the form of security.”

He adds that some people don’t like to stay passive when it comes to investments.

“If this sounds like you, FD probably won’t appeal to you. However, the fact that a FD investment doesn’t require active investor participation may actually be a good thing as it minimises investor mistakes and hence losses.”

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