The best investment option isn’t always the most obvious choice. Most of the time, the one that can offer you the most significant, but not necessarily the biggest return of investment, will probably have a number of risks in relation to its benefits. Fixed deposit accounts work in this respect.
Understanding Fixed Deposit Account
Fixed deposit account is a high security investment wherein the account holder deposits a specific amount of money to earn a specific interest rate. In Singapore, a number of banks and financial institutions require individuals to deposit an initial sum of 5,000 Singapore dollars, although this amount may vary from institution to institution.
Unlike the usual savings account, fixed deposit account holders will not be able to withdraw the money before the maturity date. Some institutions allow premature withdrawals, but at a cost. The longer the maturity period of the fixed deposit account, the bigger the return on investment. In Singapore, only those aged 21 and above can open a fixed deposit account. The account holder has the choice of receiving the return on investment in lump sum, i.e. right after the maturity date, or getting the interest of the principal amount monthly, which is a good option for retirees looking for a stable and safe financial plan. The latter option, however, may not be widely available.
Advantages and Disadvantages
The main benefit of a fixed deposit investment is security. Because fixed deposits in Singapore is regulated, this investment option is highly controlled, and more importantly, safe.
Fixed deposits also offer a significant return on investment. The collected interest rate from the fixed deposit principal is lower than the amount you can receive if you invest your money in the stock market. Stock market is flimsy and often unpredictable, one big loss in a stock market investment means you could end up losing every cent invested. In fixed deposits, there is no actual loss, since the bank or company that holds your fixed deposit is required by the law to give you the pre-determined interest for your investment as per contract.
This does not mean that fixed deposits are without disadvantages. In a fixed deposit investment, the ROI (Return on Investment) you will receive after the maturity date is pre-set according to the interest rate agreed upon during the initial deposit. It will not reflect inflation. The actual amount you will receive remains the same but its value will decrease due to inflation.
Imagine that at the time of your deposit, your money is earning seven cents per annum and the inflation is at three cents. At the time of the maturity rate, inflation is at four cents. When you get your earnings, your returns adjusted to inflation will only be three cents (7-4); had the rate stayed constant, your returns should be four cents (7-3). Inflation can be accurately predicted. While inflation forecast may not always be exact, fixed deposit account holders still have a way of predicting the value of the money they will receive, dispelling the misconception that fixed deposits are blind investments.
Dos and Don’ts of Fixed Deposit Investment
It is important to make sure that you are investing your money in the right institution. Banks, in general, are safe. Private companies may offer bigger return on investment for your principal deposit, but the risks may be more significant. When placing your money on a fixed deposit in a private company, do a prudent research on the company’s credit rating and financial history. If possible, ask for the help from an industry regulator. Be cautious and avoid fixed deposit plans with extremely high interest rates.
Fixed deposits may not offer the biggest return on investment, but the option does offer one of the safest and most secured investment return schemes. When you take your taxes into account, fixed deposits can even provide bigger returns, specifically for those in the high income brackets. T