Why fixed deposits over structured deposits?

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.

A "foreign" chest for emergency funds.

I wrote about the importance of having an emergency fund before and how it should be locked away. I also explained why I park my emergency fund in fixed deposits.

My preference has, thus far, been to park the money in UOB fixed deposits because I have a relationship with them and it is convenient for me. I simply have them deposit the principal plus interest into my UOB savings account upon maturity of the fixed deposits.

With the foreign banks, I have to tell them to send me a cheque (and make sure they do it) or to visit them to withdraw the money when the fixed deposit matures. So, although the foreign banks have been pretty aggressive in offering higher interest rates for fixed deposits, I didn't bother with them.

Apart from the perceived lack of convenience, was there any other reason why I didn't accept the many offers of higher interest rates from the foreign banks? Well, I just didn't think that the difference in returns is meaningful enough to compensate me for any inconvenience.

So, for example, Standard Chartered Bank is currently offering 1.25% interest per annum for a 15 months fixed deposit and 1.15% per annum for a 8 months deposit. This compared to 1.08% per annum for a 13 months deposit offered by UOB. The difference is 0.07% to 0.17% in interest rate per annum. Doesn't look like a big deal, right?

However, using the same argument I used before in comparing the interest rates for the CPF-SA and the CPF-OA, 0.07% is actually 6.48% more than 1.08% while 0.17% is 15.74% more!

So, although in absolute dollar terms, for a $100,000 fixed deposit, the difference over a one year period is only between $70.00 to $170.00 and does not look like a big deal, I convinced myself that it sufficiently compensates me for the effort to visit the bank upon maturity of the fixed deposit next year. For a bit of work, it is probably worth it.

Related post:
A special chest for emergency funds.