Insight - How to increase the return of your FD


The record-low overnight policy rate at 1.75% as of July, has left many Malaysians blindsided with what they should do with their savings.

CENTRAL banks around the world have taken measures to reduce their respective interest rates to stimulate flagging economies due to the challenging economic environment. But this latest move does not bode well for investors.

The record-low overnight policy rate at 1.75% as of July, has left many Malaysians blindsided with what they should do with their savings.

Suffice to say, most Malaysians have the habit of putting aside their savings into Fixed Deposit (FD) to enjoy the interest income.

But now, what was once perceived as a safe haven to steadily grow money is mired with lower and lower rate of return for example, Maybank’s fixed deposit interest rate for one month is 1.5% per annum and for one year is now 1.85%.

At such low interest rates, savers are feeling ripped off by the much lower returns from their saving accounts and fixed deposits. They feel that they couldn’t see much growth in their wealth during this period of time.

With fixed deposits no longer being an attractive option to generate a good return, many people are considering alternatives. Where do we find investment opportunities to gain an additional 1%, 2% or more returns compare with keeping the money in the FD?

Here are three investment alternatives that can help you diversify your portfolio and generate higher return compared with money in the FD.

Money market funds

Money market basically means low risk, short term debt instruments. So, money market funds are unit trusts that invest into money market investments.

Compared with other types of unit trust funds such as bond funds and equity funds, money market funds has the lowest risk.

In fact, money market funds are generally considered to be the “safest” type of unit trusts around.

Money market funds invest in the short-term debts of banks, companies and governments such as commercial papers, repurchase agreements, treasury bills as well as in ringgit deposits with local financial institutions. Money market funds offers a high level of liquidity to investors.

Many investors, while waiting for better investment opportunities, uses money market funds to park their short-term cash. Therefore, money market funds are generally suitable for any investors who are concerned about capital preservation and liquidity.

Since money market funds are invested into fixed deposits of banks, they are also susceptible to low interest rates.

However this perceived setback can be offset by the fund managers who may also invest into short-term bonds to generate higher returns for the fund.

The downside for investing in money market funds, like most unit trusts, is that an investor will face the risks of poor management, inflation and unguaranteed returns.

All in all, the returns from money market funds are still better compared with FD. According to Lipper (as of Sept 18), the annual average return of all funds under money market fund category is 2.37%. Though the return may seem low, it is still 58% higher than Maybank’s one month fixed deposit interest rate of 1.5% per annum.

Bond funds

A bond is the legal evidence of a debt, normally the result of a loan. When you buy a bond, you are effectively lending your money to the issuer of the bond. The bond issuer agrees to make periodic interest payments to you and agrees to repay you the original capital in full on a certain date.

Bond funds are unit trust funds that invest into various bond instruments, such as government bonds of developed countries, Malaysian Government Securities, investment-grade bonds, high-yield bonds and emerging markets bonds. Similar to money market funds, bond funds are fixed income funds which are generally less risky than equity funds.

Compared with direct bond investing, investing in a bond fund will not give you the bond interest nor your principal back at the bond’s maturity.

Instead, bond funds will issue regular dividends (quarterly, semi-annually or annually) as a result of it being invested into various bond issues and the coupon payments and maturities are not fixed. The good news, investors are given the flexibility of investing in bonds without being locked in until the maturity date.

Investors who choose to invest into bond funds benefit from the provision of a regular income, stability, portfolio diversification and professional management.

However, investors need to be aware that not all bond funds have the same risk and return profiles. The risk and return profile is normally determined by the underlying bonds which the fund holds.

For example, bonds issued by the governments of developed countries are considered the least risky, while high-yield and emerging market bonds are the riskiest.

Look at it this way, the returns from these risky bonds are potentially higher than those of the “safer” bonds. According to Lipper (as of Sept 18), the annual average return of all funds under bond fund category is 4.99%.

That said, there are a lot of opportunities for high investment-grade bonds in the market. If you are keen to generate higher return than FD, you should consider investing into bond funds that holds good corporate bonds.

REITs

Have you ever wished you can own a significant landmark property around Klang Valley?

With real estate investment trusts (REITs), you can be a proud “owner” of shopping malls, hospitals or office towers and earn rental income at the same time.

REITs are trust that purchases and manages real estate assets using the combined investment resources of many investors. In Malaysia, REITS are listed in Bursa Malaysia, just like any other shares. REITs offer greater flexibility because you can buy and sell them easily on the stock market.

Like shares, the downside risk of investing into REITs is its price volatility; prices will fluctuate according to market sentiment.

Through REITs, you can easily own a diversified portfolio of properties but unlike conventional properties, a large capital is not required.

Instead of buying one physical property, the same amount of money can allow you to invest into many different types of properties in different locations using REITs.

In addition, you also enjoy recurring rental income from investing in REITs. The rental rates depend a lot on the demand for the property.

So, it is important to choose REITs that are not only well-managed, but are situated in good locations. Remember the mantra of property investment: location, location, location. It also applies when investing in REITs.

The rental income for certain sectors of REITs, retail for example, is currently negatively impacted by Covid-19.

According to Bloomberg data as of Sept 28, the trailing (past) 12 months and estimated dividend yield for Bursa Malaysia REITs Index stands at 5.1% and 4.5% respectively.

As a result of the low interest environment, many FD savers have taken to exploring various investment alternatives to gain higher return.

However, before you take your money out from FDt to invest, do your research and due diligence.

Don’t get caught up over the promised (too good to be true) attractive returns. Be mindful of the risk of losing your capital or worst, all your hard earned money. This is especially critical, if you are putting money into investments with higher risk than those which I have shared earlier (money market funds, bond funds, REITs).

Therefore, ask lots of questions and do your research before parting with your hard-earned money.

Ideally, plan before you invest. If you are still going ahead with plans to withdraw from your FD, the least get a written investment plan done so that you have a clear picture of your current financial position. From then on, craft your going forward strategies before investing your money.

Yap Ming Hui is a licensed financial planner. The views expressed here are the author’s. Any reliance you place on the information shared is therefore strictly at your own risk.

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