Are Fixed Deposits Still Worth It In 2021?
A few years ago, you could get a 4% return per year on your fixed deposit. But in 2021, you would be lucky if your bank offered you something above 2%. Are fixed deposit yields barely hedging inflation still worth it? Let’s dive in.
Interest rates are at their lowest
Last year, Bank Negara Malaysia cut the overnight key rate (OPR) four times, to an all-time low of 1.75%. It was to help the economy recover from the impact of the COVID-19 pandemic. While this is good news for borrowers who take out loans (because you are paying lower interest rates), it also means reduced interest rates for term deposits and savings accounts.
Fixed deposits always make sense in these situations
Despite low returns, fixed deposits are great at being two things: secure and predictable.
Your fixed deposit is guaranteed to grow at predetermined rates, so you’ll know exactly what you’re getting. Fixed deposits are also automatically protected by Perbadanan Insurans Deposit Malaysia (PIDM). This means that in the unlikely event that your bank goes bankrupt, PIDM will reimburse you with the money you deposited, to the tune of RM250,000.
On top of that, you can instantly access a fixed deposit at any time. If you’ve made a deposit online, you won’t even have to go to the bank to withdraw it – you can have your money transferred in minutes through online banking (although you may incur a penalty of deposit. interest to terminate the term earlier).
A fixed deposit is therefore meaningful for you if:
- You are retired or are going to retire. You may not be able to invest in risky assets anymore because you will not have time to recover from big losses. You may need to keep some of your savings in term deposits.
- You need to use your money soon. If you’re saving for a short-term goal – say, a down payment for a new car or a master’s degree next year – you need a safe place to keep your money, so you can use it when the time comes. .
- You need a place to keep your emergency savings. Your emergency savings should generally cover at least six months of living expenses and should be instantly accessible. This is usually kept in a fixed deposit or savings account.
On the other hand, a fixed deposit might not make sense if you use it to store all your savings. Currently, fixed deposit returns can just help cover inflation, and not much else.
If you can afford to do so, consider branching out into other investments. As a young investor, keeping most of your savings in fixed deposits means losing potentially higher returns and not being able to meet future financial goals. And if you are an older investor who wants to preserve your money, you can also try other low risk investment options that may offer better returns.
How to improve the return on your savings
Here are some ways to get the most out of your savings:
1. Switch to a higher yielding fixed deposit
Look for other banks that might offer you better rates. Use our handy fixed deposit comparison page to quickly discover the best rates and estimate your returns.
In addition, some banks offer seasonal promotions on fixed deposits. Here are a few to watch out for:
Interest rates shown are for six-month terms; accurate in January 2021
2. Staggering of fixed deposits
The fixed deposit ladder is a strategy that spreads your money over different securities – it gives you more flexibility when accessing your money and helps you take advantage of the best rates.
To set up an initial scale, you can split your money as follows:
- Fixed deposit 1: RM5,000 within one year term
- Fixed Deposit 2: RM5,000 in a two year term
- Fixed Deposit 3: 5,000 RM in a three year term
- Fixed Deposit 4: 5,000 RM over a four-year term
At the end of each term, you will renew each fixed deposit into four-year terms. This means that each fixed deposit will have a term of four years which benefits from better rates because banks offer higher rates the longer your term. You will also have a fixed deposit that expires at the end of each year, so you can easily access your money without incurring a penalty for canceling your mandate.
When setting up a fixed deposit scale, the mandate is yours – you can set up shorter durations (one month, two months, etc.) depending on the accessibility you want your funds be. If you expect interest rates to rise soon, you can also opt for shorter terms so that you don’t have to cut rates. On the other hand, if you expect interest rates to fall, choosing longer terms can help you get better rates. As of January 2021, economists believe that Bank Negara is unlikely to reduce the RPT this year.
3. Look for low risk investments
Fixed deposits aren’t the only place to put your money, although you value security. You can also consider these low risk investments:
- Money market or cash management fund. These unit trust funds invest in short-term debt that is loaned to banks and government. These funds carry very little risk. Over the past five years, these funds have generated returns of around 2.78% to 3.45% per annum (depending on the funds listed on Fundsupermart). Alternatively, platforms like Stashaway Simple invest in a cash management portfolio for you and have an expected rate of return of 2.4% per annum.
- Obligations. A bond is a debt instrument issued by governments or companies that wish to raise funds. When you buy a bond, you lend money to the issuer, in exchange for interest payments. Buying a bond directly from a bank costs RM250,000, but regular investors can buy exchange traded bond funds (ETFs) on the stock market or bond trust funds. The best performing funds of Fundsupermart have generated annual returns of over 6% over the past five years.
- ASB / ASM. Amanah Saham Bumiputera (ASB) and Amanah Saham Malaysia (ASM) have historically provided decent returns. They are considered low risk because the price of each unit is set at RM1. You can also easily withdraw your investments at any time.
- High yield savings account. It’s not technically an investment, but high yield savings accounts can generate returns over 4%. But the catch is, you’ll have to jump through a few hurdles to be eligible for the best rates – it could mean spending a certain amount, meeting a savings requirement, or purchasing insurance products through the bank.
4. Diversify into higher risk investments
If you are young and have a high tolerance for risk, you shouldn’t be spending all your money on term deposits. You could put some of your savings in higher risk investments for better returns (but avoid investing your savings urgently). This could mean investing in stocks, ETFs, REITs, and unit trust funds. You can also hire a robotics advisor to estimate your risk profile and help you invest in suitable assets. See our RM1,000 investment guide for an overview of these options.
Fixed deposits still have their place
In short, term deposits probably still play a role in your personal finance journey, especially if you’re older and need to preserve your savings. To get the best returns, find banks with better rates and use a laddering strategy. Remember, you don’t have to keep all of your savings in a fixed deposit – there are other low risk investments out there, and if you can afford the risk you can also consider higher risk investments. .
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