No alternatives to fixed deposit despite low rates


Excellentte Consultancy financial planner Jeremy Tan said: “ There are no alternatives to FDs since it gives an almost risk-free return, which no other asset classes can give out.”

PETALING JAYA: The returns on fixed deposit appears to be diminishing, given the current low interest rate environment in Malaysia.

This will put net savers at a disadvantageous position, even when the government is trying to spur more spending to boost the economy amid the raging Covid-19 pandemic.

On Wednesday, Bank Negara decided to keep the overnight policy rate (OPR) unchanged at 1.75%.

However, there are strong expectations that the OPR could see further cuts in the upcoming quarters this year.

To put into perspective, interest rates in Malaysia have taken a steep fall within a short period of time during 2020, from 3% to the lowest-level ever at 1.75% at the end of last year, due to the pandemic.

It appears that Malaysians, who were used to slightly higher risk-free return exposure, would now have to live with a lower interest rate regime, at least for the time being.

At this juncture, people who traditionally were dependent on the interest rate returns from their fixed deposits (FDs) would by and large see their incomes affected.

According to Socio-Economic Research Centre (SERC) executive director Lee Heng Guie, (pic below) the net savers came from various age groups, including the younger savers who are in their 20s or 30s.

“Any cuts in the interest rate will put these groups on the losing end. The purpose of a rate cut is actually to spur spending, ” he told StarBiz.Pursuant to this, each person should keep his or her risks profile at the forefront of their mind should they decide to adjust their investment allocations to take on higher risks for a higher return.

“I expect pensioners or retirees will also be impacted and many of them will need to adjust to the lower returns environment.

“Hence, this will call for an adjustment in spending, or since they are left with no choice, many will have to spend their principal amount, ” he added.

However, Lee said the low interest rates regime will not remain low forever.

“The current low rates are due to the pandemic.

“Once it goes up, one would have to start thinking of paying back the higher interest (especially for those with floating rate loans), ” explained Lee.

Meanwhile, Excellentte Consultancy financial planner Jeremy Tan said: “ There are no alternatives to FDs since it gives an almost risk-free return, which no other asset classes can give out.”

FD is an asset class by itself and the returns are fixed and depend on the duration, and the risk factor is also minimal.

“Other investment options are of different asset classes with varying risk levels, ” added Tan.

He noted that asset classes such as bonds, shares or unit trusts are not an alternative to FDs.

“However, the other asset classes could form part of an investment portfolio to mitigate the risks and also, as a form of diversification for an individual financial goals to meet their objectives and needs, ” he said.

Therefore, when considering other asset classes, it is important that one should invest in accordance with his or her risk profile that is correlated with their age group.

For the younger savers, they might want to consider investing into the property market.

Investing into a property has been a long favorite among people as there is a potential for rental yield and price appreciation but this category too has its inherent risks.

There are risks for this asset class such as the non-completion of a property or even the interest rate rising again

Other than that, property investment is for the long haul as it requires a long term commitment, including upkeep and maintenance once it is completed.

Property investment is also not considered a liquid investment asset class that can be quickly sold off to realise its cash value since it would take time to find buyers and complete the transaction.

Another asset class that can be considered is through unit trust investing which has varying level of risks within the category.

This is because one can be exposed to different asset classes such as bonds or the equity market which has a higher risk.

There are also fees and charges that one has to consider when deciding if they should diversify into unit trust investing as it would affect their breakeven point.

There is also then the option of investing directly into the stock market individually through a broker.

However, this is a risky endeavor especially for those without experience and capital can be easily diminished if one is not careful or educated.

Publisher's note: An earlier version on the print and online copy of this story had unintentionally wrongly attributed part of the last ten sentences of the story to Tan. This was an unintentional mistake and has now been corrected.

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