Fixed deposits (FD) are one of the most stable kind of investment tools, which you can opt for to earn higher returns. Let’s take a look at the advantages and disadvantages of investing in a fixed deposit.
- There is a guaranteed return which is associated with fixed deposits. It provides assurance and allows steady returns.
- Fixed deposits have a minimum number of risks. In Malaysia, the Perbadanan Insurans Deposit Malaysia (PIDM) provides additional protection to the investors, in case the bank suffers a failure.
- These are different time periods to choose from. Depending on your need for liquid cash, you can compare between different long-term and short-term loans, and choose one.
- Loans are easier to get once you have invested in a fixed deposit. Since it is a steady amount of investment, be sure that these deposits will improve your credit score. Ideally, you can borrow almost 90% of the amount under your FD.
- There are different rates of interest to choose from when you are investing in a FD. Foreign currency fixed deposits have a larger rate of interest usually than other fixed deposits.
- You can customise your interest to be paid in regular intervals. In Islamic deposits, you may choose a form of investment which would allow you to get returns every quarter or half year.
- Foreign currency deposits offer interest rates as high as 8%p.a making it a viable option.
- Since fixed deposits have low returns as compared to other investment options, it might not be favourable for you if you are looking for great returns.
- Fixed deposits have a poor cover against inflation, with unchanging rates of interest over years. If your fixed deposit rate of interest is 4%, and the current inflation rate is 3.5%, the value of your investments would increase only by 0.5% (4%-3.5%=0.5%).
- You would lose interest if you withdraw from your fixed deposit before maturity. Therefore, it is not a great mode of investment if you need liquid cash on a short notice. There may be penalties to fill as well.
- There are no tax benefits available on fixed deposits in Malaysia.
- You cannot add more money into an existing FD, which does not allow flexibility into the account. In order to add more money, you can wait for the maturity of the FD and then reinvest with the additional amount and the interest earned on the initial deposit.
- There are not many opportunities to diversify your investments if fixed deposits is your only mode of investment.
Should you invest?
You can invest in fixed deposits if you do not want risky business concerning your money. Those who are just starting out in your career, it is much safer to invest in FD than in shares and mutual funds where market risks are applicable. It also requires zero active participation from your end, which makes it hassle-free. In case you are looking for higher returns, a FD investment will not appeal to you.
If you are investing in FD, keep the following points in mind.
- Make sure that you are aware of hidden fees and charges when signing up for the FD>.
- Go through the conditions for premature withdrawal on your deposit in order to avoid large penalties.
- Remember that you won’t have access to the funds once you invest in a FD.
- Do check any additional charges that may be applicable, such as Withholding Tax.
- There is no guarantee on the principal amount on Mudharabah fixed deposits. In case there is a loss on the investment, you would bear the entire amount of the loss.
- Know that there is no guarantee of “expected returns” when signing up for a Wakalah deposit.
- There is a risk on the exchange rate if you are investing in foreign currency FD.
- Foreign currency FD accounts and account holder would be operating under the guidelines under the Exchange Control of Malaysia (ECM) Notices and Bank Negara Malaysia.