What Is A Fixed Deposit, And How Does It Work?
A fixed deposit, or “FD,” is a type of bank account that promises the investor a fixed interest rate. In return, the investor undertakes not to withdraw or access his funds for a fixed period.
In a fixed deposit, interest is only paid at the very end of the investment period. Since the term of the investment and the interest rate are fixed, you can easily calculate the interest you will earn at the end of any fixed deposit investment.
How do fixed deposits work?
When you open a fixed deposit account, you have the option of choosing a mandate (also called a “term”). When you choose a tenure, you decide to put your money aside and not touch it for a period of time (one month, three months, six months, a year, etc.). These tenures can vary from one month to five years.
Each mandate carries a predetermined interest rate. For example, banks normally quote their interest rates on fixed deposits in a table similar to the one below:
In the example above, if you open a fixed deposit with a term of 12 months, you will be entitled to an interest rate of 3.15% per annum after three months. An investment of 10,000 RM with a duration of 12 months will give you 15 RM at the end of the term.
In general, the longer the term of office, the higher the interest rate will be. Banks often also offer promotional fixed deposit rates, so it’s good to always be on the lookout. Promotional rates can go up to 4.00% for a period of 12 months.
What happens when you withdraw your funds before the end of the term?
If you withdraw your funds before the end of the fixed deposit period, you could lose some or all of your interest.
So, before you put a large amount of money in a fixed deposit, you should consider whether you need these funds for the foreseeable future and plan your mandates accordingly. Otherwise, an early withdrawal could cost you thousands of ringgit in interest.
Some people get around this problem by placing several fixed deposits with different tenures (this is called fixed deposit scale). For example, let’s say you have 30,000 RM. You can invest RM 10,000 on a one-year term, RM 10,000 on a two-year term, and RM 10,000 on a three-year term. This distributes your money so that it is more accessible, rather than locking it in for several years.
What types of fixed deposits are there?
Here are some types of fixed deposits that you will find in Malaysia:
- Short-term fixed deposits. Do you have extra funds to put aside, but still need them in a month or two? Consider placing your funds in a short-term fixed deposit. The interest you get won’t be overwhelming, but it’s better than nothing.
- Long-term fixed deposits. If you don’t need to access your savings at any time in the near future, consider putting them in a long-term fixed deposit. Some banks offer terms of up to five years. In general, the longer your term, the better your interest rates.
- Islamic fixed deposits. Islamic Fixed Deposits are based on the Sharia concept of the Murabahah commodity. When you place a deposit in an Islamic fixed deposit, you are essentially buying an approved Sharia-compliant product and selling it at an agreed premium price. As a result, you generate returns from your funds without involving the notion of interest.
- Fixed deposits in foreign currencies. These fixed deposit accounts allow you to hold savings in foreign currencies. This is useful if you need to protect your savings against exchange rate fluctuations.
- Junior fixed deposits. Want your child to develop a saving habit? While conventional fixed deposits typically require you to be 18 and over to apply, young savers can open an account with banks that offer junior fixed deposits.
- Fixed deposits for seniors. Are you a retiree wondering how to protect your nest egg? Think of a fixed deposit for seniors. Some fixed deposits, such as Hong Leong Bank’s Flexi Senior Savers Fixed Deposit, allow you to make an early partial withdrawal without losing interest.
What are the advantages and disadvantages of term deposits?
So why should you put your savings in a fixed deposit? Here are some advantages:
- Low risk. Unlike investing in the stock market or in 50/50 trust funds, it is prudent to put your money in a fixed deposit as your interest returns are guaranteed.
- Your money is insured. In the (highly unlikely) event of your bank failing, Perbadanan Insurans Deposit Malaysia (PIDM) will reimburse you with the money you deposited, up to RM250,000.
- Higher interest rates. Fixed deposits usually earn you more interest than savings accounts.
- You can easily withdraw your money. Need your money for a financial emergency? With fixed deposits, you can withdraw your money at any time, but if you do so before your term ends, you could lose some or all of your interest.
But you should also keep these disadvantages in mind:
- May lose interest. Fixed deposits are not very flexible. If you withdraw your money before the end of the term, you could lose your interest.
- Low returns compared to investment. If you are a younger investor who can afford to take risks, you should not be completely relying on fixed deposits to grow your funds. This is because other investment options (even at low risk) have the potential to generate higher returns.
What is the difference between a fixed deposit account and a savings account?
A fixed deposit account is similar to a savings account because they are two low risk options for making your money grow.
However, a major difference between the two is in the interest rates offered. Fixed deposit accounts typically offer much higher interest rates, around 1.4% to 2.4% per annum; savings accounts, on the other hand, typically offer interest rates of around 0.2% to 1.5% per year.
Some savings accounts have similar (or higher) interest rates to fixed deposit accounts, but they come with a few conditions – you may need to deposit a large amount of savings, use your account to pay a certain number of bills or spend a minimum amount with your associated credit / debit card each month.
Which banks offer the best fixed deposit rates?
The best fixed deposit account for you isn’t necessarily the one with the highest interest rates, but the one that best meets your needs. However, these banks currently offer the highest interest rates for a six-month term:
Prices are correct as of December 2020
What are the historical fixed deposit rates in Malaysia?
Curious about how current interest rates compare to those of decades past? In 2019, the average interest rate on deposits was 2.983%. However, this year, the average fixed deposit interest rates offered by banks have fallen in line with the four overnight key rate (OPR) cuts.
Now that you know all about fixed deposits, you can browse the iMoney comparison pages for the best classic fixed deposits and Islamic fixed deposits.
Sure, putting your money in a fixed deposit account is a great way to safely grow your wealth, but it’s not the only one. If you have many years to go and can tolerate the risk, consider investing your savings as well.
This article was first published in 2012 and has been updated for its freshness, accuracy and completeness.
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