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Why fixed deposits over structured deposits?

Friday, July 11, 2014

Recently, I came across offers from two banks to place money in structured deposits offering higher returns than fixed deposits. The promised returns were approximately 1.45% to 1.85% per annum in return for the funds being locked up for 4 to 6 years.

I was not attracted by these offers because:

1. Whether this money is a part of my emergency fund or my war chest, in the event that I need to use the money during the lock up period, there will be punitive costs which I have to bear.

2. To avoid these costs, once in, the only option is to stay with the product till maturity. A time period of 4 to 6 years is relatively long and there is a good chance that opportunities might come knocking during that time.

3. There are many offers of promotional interest rates for fixed deposits by banks here and I recently placed some money in a 15 months fixed deposit for an interest rate of 1.25% per annum. Being offered only 0.2% to 0.6% higher interest rate per annum in return for a 4 to 6 years lock up period seems inadequate to me.

4. With fixed deposits, there are no punitive costs to bear (except to lose the higher interest rate) if I should have need for early withdrawal.

Whether it is money in my emergency fund or money in my war chest, 12 months fixed deposits (give or take a few months) with "promotional" interest rates are good enough for me to park a large portion of the money. The rest of the money should be retained in my savings and trading accounts to meet short term needs and to react more quickly to emergencies and opportunities.

Structured deposits could be a good thing for some savers but unless the lock up period is much shorter while retaining higher interest rates compared to 12 months fixed deposits I doubt it is a good thing for investors.

Related posts:
1. A special chest for emergency funds.
2. A "foreign" chest for emergency funds.

9 comments:

veronika said...

What are your reasons for not buying bonds that have maturity dates below 4 years?

Some have yields between 2.5% to 6%. Its an alternative to parking in an FD for 12 or 24 months.

Although opportunities can spring up suddenly, in the present stock market,(SGX), I doubt anything exciting will occur in the next 12 to 24 months. This is based on the extremely slow ( or non-existence ) of interest rates rising.

From just about any corner you look, interest rates will rise. But it will be so gradual that some of us ( those debt free ones!) may not notice. ( those who have debts will be the first to know!)

Till then, money needs to be parked somewhere... and at the moment its the stock market. Unless political turmoil is evident, interest rates seem to be the only catalyst for money to flow out of the stock market and that is when, ( maybe ) the opportunity to buy comes along.

Property in my mind is definitely a no!no!.. too long a time horizon, and since interest rates will rise property values will drop. ( besides factors like supply, etc )

AK71 said...

Hi Veronika,

I am glad you brought this up. :)

Well, I want to keep money in my emergency fund and war chest close at hand and I don't want to run the risk of possible capital loss with money that essentially already have been earmarked with specific functions.

A short lock up period with an almost non-existent risk of capital loss is, therefore, what I look for. Fixed deposits meet these requirements.

I believe that investment grade bonds or preference shares which are maturing within the next 12 to 18 months could be good alternatives for me but not those which are maturing in another 3 or 4 years.

However, what holds me back is the thought that if I should need the money before the maturity dates, I could suffer capital loss if interest rates should rise quite suddenly. I cannot say with confidence that it won't happen. -.-"

So, for a peace of mind, I go with what meets my selection criteria fully. :)

arithmos said...

The local bonds offered by the bank are not necessarily liquid, often not. You are at the mercy of what the traders offer you from the bank. The spread is also your cost, first when you buy and when you sell. A small shift in interest rate can actually affect your bond value esp for longer term bonds.

AK71 said...

Hi arithmos,

Yup, this is why only bonds which are nearer maturity would somewhat interest me, especially for the purposes which I have earmarked the money under discussion for. :)

veronika said...

If bonds were bought at time of issue and held to maturity, the yield would be constant.

Assuming a bond bought at par ( of course there are fees and charges by the bank selling it on behalf of issuer)
in 2011 and held till it matures in 3 years, ( 2014 )at a yield of 4%, its not too bad, if you compare it to buying Kepcorp, or Marco Polo marine.

Interest rates will affect bond yields, yet during these times, its too hard to time the stock markets and if passive income is a priority, short term bonds offer a better deal.

Yields will be affected if bonds are traded, but if held to maturity, it is fine.

The risk is default, but that is reflected in the bond's coupon already. Anything higher than Government securities is a higher risk.. but that is what this is all about:

Compensation of risk

AK71 said...

Hi Veronika,

The argument that short term bonds as a diversification tool have a place in an income portfolio is a persuasive one for me. :)

However, as a tool to hold the money in my emergency fund or war chest, I am not so sure.

Jes said...

Hi AK,

I have always been reading silently. Anyway, was just thinking that OCBC 360 account seems better than the fixed deposit you mentioned, and with no lockdown period.

http://www.ocbc.com.sg/personal-banking/accounts/360-account.html

AK71 said...

Hi Jes,

3.05% interest per annum on the first $50,000 is very nice for anyone who is able to meet all the conditions.

My situation now:

1. My employer issues cheques to pay our salaries.

2. I hardly pay any bills online. I go to the AXS machine usually.

3. I don't have an OCBC credit card and I don't want another card. I have been cancelling my existing cards.

However, I have been thinking that getting 2.05% might not be too bad (by fulfilling conditions #2 and #3). Get $1,000 in interest income per year.

It is a pity that the higher interest is only payable for the first $50,000. ;p

Thank for the reminder and I look forward to hearing from you again in future. :)

ryan said...

Hi Jes,

I agree, the OCBC 360 account is quite awesome (while it lasts) - let's hope it stays that way for some time!

Hi Veronika,

What kind of short term bonds are available, and where do we purchase them? I always had the impression that corporate bonds are only for "accredited investors", other than the very few options like capitamall asia retail bond, which is rather long at 7 years, and at a low 3% as well.

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