A Beginner's Guide to a Fixed Deposit Account
Looking for ways to grow your money can be a daunting task, especially when thrust into the world of financial investment. However, compared to the various ways one could build your savings, fixed deposits offer a more secure and convenient way.
In Malaysia, your fixed deposit can get approved in as fast as an hour! Here, GoBear will guide you on fixed deposits; why you should get one, the types of fixed deposits available, and which fixed deposit is right for you.
What is Fixed Deposit?
A Fixed Deposit or commonly known as FD in Malaysia is a financial tool from banks where you deposit money for a fixed time. The money you deposited should only be withdrawn upon maturity, which means you are not advised to withdraw your investment until the set duration has ended without being penalised with a fee. An FD may also be referred to as a Term Deposit.
Unlike regular savings account where interest is calculated and paid at the end of each month, the interest is only paid once maturity is attained. For instance, if you invested your savings for a year, you’ll enjoy the principal amount along with interest at the very end of the investment period. You can calculate the amount of interest you will earn as both investment term and interest rate are already fixed.
What are the types of Fixed Deposits?
There are different types of fixed deposits account in Malaysia. Let’s take a look at each of them and their benefits.
Short-term Fixed Deposits
If you have a quick savings goal, a short-term fixed deposit is suitable for you. You don’t have to wait for years until it attains maturity since this type of fixed deposit usually has a shorter period. It can be as short as one month or a good six months - depending on how you want it. Other common short-term fixed deposit terms range from one to nine months.
Long-term Fixed Deposits
Those that are 12 months and above are usually considered to be long-term, and it can reach up to five years in Malaysia. This means that you will not be able to take out your savings during its tenure. A long-term fixed deposit is good for you if you don’t need to access your funds and want to enjoy higher interest rates.
Conventional Fixed Deposits
A conventional fixed deposit offers a guaranteed rate of return based on the period of investment. Their fixed deposit terms vary from 1 month to 60 months depending on the bank and the product.
Regardless of the bank’s performance, the predetermined rate of fixed deposit needs to be honoured over the agreed period of time ensuring that you will be paid the agreed interest at maturity.
Islamic Fixed Deposits
Unlike conventional loans, the depositor’s return is solely based on bank’s performance, which means the profit rate may vary. This is because ‘riba’ (interest) element is prohibited under Shariah principles.
There is a diverse selection of Islamic fixed deposits under Islamic banking. The following are the different Islamic fixed deposits in Malaysia you will come across:.
- Mudharabah Deposits. In Mudharabah deposit, you will invest money with the bank for a fixed term. The Mudarib (bank manager) then spends the money in Shariah-compliant avenues. There is a pre-determined profit sharing ratio between the customer and the bank where the profit shared is calculated monthly.
There are three types of Mudharabah fixed deposit contracts. However, the Mudharabah General Investment Account (MGIA) is the most popular among investors.
- Murabahah Deposits. Like an Islamic loan, the Murabahah refers to buy-and-sell contracts at a higher cost and profit. This involves the purchase and sale of assets between two parties (Bai Al-Enah) or multiple parties (Tawwaruq or Commodity Murabahah). Instead of money, Bai Al-Enah deposits a broad range of assets that are Shariah-acceptable excluding gold and silver, while Tawarruq deposits “halal” commodities. The profit is pre-determined and may be paid immediately or on a basis depending upon the term of the deposit.
- Wakalah Deposits. In Wakalah deposits, the bank acts as an agent (Wakil) in charge of your finance. As an agent, the bank will manage and invest your assets in Shariah-compliant investment to provide an “expected rate of return”.
Which investment term is for me?
The types of fixed deposits above should give you an idea which investment term is for you. When choosing the right term of fixed deposit for you, make sure you know that many banks need a different minimum deposit depending on the term you want.
Fixed deposits are tiered, where the larger the sum of money and longer period you choose, the higher the interest rate.
You should also consider the following before applying for a fixed deposit:
While banks usually don’t charge any establishment fees, setup fees, or periodic charges with fixed deposit accounts, you should still check with your bank before signing any contract.
However, there will be a penalty fee If you decide to break your contract earlier than what was agreed.
Penalty fee calculation
Each bank has its own calculation when implementing the penalty fee for early withdrawal. Some choose to remove a percentage off your interest rate. For instance, if your interest rate for a 6-month tenure is 4%, and the bank’s penalty rate is 2%, then you’ll only receive 2% of interest in your funds at the end of the 6-month period.
Others charge a “break cost”, a one-time fee payable to the bank for breaking the agreement. There are several factors when considering the break cost; this includes the bank’s interest rate, the interest rate agreed upon, and the amount of money you deposited.
Therefore, it’s important to consider your readiness to lock your money away for the agreed period before you sign any contract knowing that a penalty fee will be imposed on you if the fixed deposit is terminated earlier than its maturity date. It would then be safer to opt for a shorter term if you still want to apply for a fixed deposit.
When you invest in fixed deposits, one of the most important things to consider is the interest rate. The longer the period, the higher the interest rate offered. Likewise, this also applies to short-term fixed deposits, where the shorter the term, the lower the interest rate offered.
In Malaysia, the interest rate for a fixed deposit ranges from 3-4%. However, banks sometimes include special or promotional rates for short-term fixed deposits with conditions attached. For instance, banks offer a high-interest rate if you have a significant minimum deposit amount.
How does it work?
A fixed deposit cannot be withdrawn for a fixed period without a penalty. The term can vary from one month to five years, depending on the bank.
The terms come with a fixed interest rate. Banks usually quote their pre-determined fixed deposit interest rate. To give you an idea, check out the illustrated table below:
Interest rate (%p/a)
For example, if you invest RM15,000 for six months with an interest rate of 3.10%, you will get a return of RM232.50, plus principal amount to a total of RM15,232.50 at the maturity of your fixed deposit. Think about it, instead of spending this amount somewhere else, you save it just in a short duration of 6 months!
You can get a higher interest rate than what is regularly offered if you invest a larger amount of money. But of course, if you want higher returns, you should always compare all the providers in Malaysia and look for promotional rates with a high-interest rate.
How to calculate your fixed deposit rate
Before you take out a fixed deposit, you need to know how banks quote an annual interest rate and understand how to calculate it on your own.
A fixed deposit interest is computed daily. To illustrate with the sample above, most banks in Malaysia calculate the total interest rate earned by:
Money Invested x Interest Rate Quoted x (Placement Period in Months/12 Months) = The Total Interest Earned
RM15,000 x 3.10% x (6 Months/12 Months) = RM232.50
(*Note that this is only an approximate figure)
Why should I open at least one
Inflation rates in Malaysia play a big role on interest rates when it comes to FDs. Bank Negara Malaysia expected the inflation to moderate further with a forecast range of 3.0% - 4.0%. As of October 2017, the inflation rate has increased to 3.7%.
The highest inflation rate so far in 2017 is 4.5% in April, where the last highest inflation rate touched 5.7% eight years ago. This greatly affects your investment in stock markets when the inflation rate rises.
Many investors are not aware that they should consider inflation rate and and interest rates before taking a FD. When an investor invest his assets in a stock market, the value of his investments diminishes over time to the extent of the rate of an inflation.
With inflation rates increasing, you’ll lose more investments than actually saving. When this happens, a fixed deposit offers a safer and return-guaranteed investment regardless of whether the market prices shoot up or not, giving you a peace of mind.
Fixed deposits are low in risk with a guaranteed return on investment. However, you must consider the duration of the investment and the penalty charges that come with it.
You should also keep in mind that building your savings by investment is better than letting it gather dust in a regular savings account. When you compare the interest rates of fixed deposit, make sure to watch out for these non-standard terms and conditions at all times!