Traditionally, Singaporeans have sought to protect the value of their hard-earned money by investing in assets like stocks, unit trusts, and bonds. However, the financial markets globally have been under strain over the past year.
The effects of the Russian invasion of Ukraine were far-reaching, affecting food supplies, energy prices, and transnational shipping. Against this backdrop, the impact of the extensive but temporary COVID-19 stimulus faded, while the realities of inflation caught up. In response, the US Federal Reserve hiked interest rates at a pace rarely seen in history.
Fixed deposits are a relatively simple financial instrument to understand. You agree to deposit a lump sum of money with the bank, and the bank promises to return your principal with a fixed amount of interest at the end of an agreed upon tenor.
Now that you understand the basic principles of how they work, here are other nuances prospective depositors should know about.
Currency: While SGD is the most common currency in which fixed deposits are denominated, you can also choose from fixed deposits in foreign currencies, including USD, GBP, HKD and others. Using these fixed deposits would expose you to foreign exchange (forex) risk but they can be a good way to hedge against the Singapore Dollar.
Tenor: Fixed deposits have tenors as short as a month and as long as five years. Choosing an appropriate tenor would allow you to retain an appropriate level of liquidity, so you avoid having to terminate your fixed deposit earlier and incur early withdrawal fees and/or forfeit any interest due to you.
Board vs Promotional Rates: Board rates are what banks are committed to pay on all fixed deposits. They are seldom revised and tend to hover around 0.05% per annum. In contrast, promotional rates are offered and marketed to entice new customers. These rates are updated regularly and usually have terms and conditions like minimum tenor or maximum deposit amount.
Minimum/Maximum Deposits: This amount depends on the banks, but minimum deposit amounts typically start at around $1,000. While there isn’t a maximum deposit you can place, banks typically do not pay promotional (higher) interest on deposits above a certain deposit amount.
Singapore Deposit Insurance Scheme (SDIC): Fixed deposits and money in savings accounts of banks registered and operating in Singapore are insured for a combined total of $75,000 per account holder at each bank. This means that even in the extremely unlikely scenario a bank in Singapore goes under, you will still receive your deposits, up to $75,000.
Guaranteed Principal and Returns: In these times of market volatility, depositors appreciate the fact that for fixed deposits, they do not need to put their capital at risk. Furthermore, those who are investing for the short-term and might not have the time horizon to ride out a recovery will also find the guaranteed returns offered by fixed deposits appealing.
Simple, with No/Low Fees: Unlike investing in the stock market or buying bonds, growing your wealth with fixed deposits does not require any analysis of companies, checking debt default rates, or monitoring charts to find a suitable entry price. Fixed deposits are simple, and if you keep them till maturity, typically do not incur any fees.
Safe and Highly-Regulated: All banks in Singapore that serve retail clients are highly-regulated and regularly audited, with strict capital requirements to ensure that these banks will be highly-unlikely to default on their obligations to depositors, including those whomake fixed deposits with them. And the aforementioned SDIC provides yet another safety net.
Rigid and Inflexible: The certainty that fixed deposits provide also means that deposits will not be able to redeem their deposits early without forfeiting their returns, and they might also be subject to early redemption penalties. As such, depositors need to choose their tenors carefully.
Limited Utility for High Net Worth Individuals: Since banks do not pay higher interest above a certain threshold, high net worth investors who wish to park large sums of money in a risk-free instrument will likely need to look elsewhere.
Capped Upside Potential: The fixed returns that fixed deposits provide is a double-edged sword, since any recovery in the economy or continued rise in interest rates will not be reflected in fixed deposits previously-made.
For those who cannot stomach volatility and risk, fixed deposits are just one financial instrument they can use. In this rising interest rate environment, Singapore Savings Bonds (SSBs) have also garnered plenty of interest. Even after increasing the total amount of bonds issued, SSBs continue to be oversubscribed, which resulted in many applicants getting much less in bonds than they hoped for.
For investors who do not mind taking on some volatility, cash management accounts could be an instrument to consider, though some have reported mixed results with them. It is also important to note that any reported returns are retrospective, and any stated projected returns are speculative.
Insurance companies also offer endowment plans, with fixed returns as well as variable returns. One key feature you should take note of is the poor surrender value that you receive if you were to surrender the policy prematurely. As insurance-investment hybrid products, you do get a small amount of insurance coverage by purchasing these plans.
Finally, for those who don’t mind looking outside of traditional financial instruments, yield-generating stablecoins have established themselves as an extremely compelling tool for savvy investors. For example, Dezy gives users returns upwards of 5% and does not charge any no-fees, with no lock-ins.
Decentralised finance is an emerging field with fluid regulations. Learn more about the risks involved.