• Calculation of Fixed Deposits

    A Fixed Deposit or an FD is considered as the safest form of investment that has guaranteed returns and no risk involved. It is a popular choice among first time investors due to its simple nature and ease in management. All one needs to do is invest the money and sit back and watch it grow. Below are the basic tenants of a fixed deposit, the types and how the interest is calculated.

    Advantages of Fixed Deposits:

    • Return on Investment is guaranteed: A fixed deposit does not require in depth knowledge of the stock markets. One need not be a stock broker to invest in a fixed deposit. Spare cash or savings can be deposited into a fixed deposit and upon maturity the principal amount plus interest is paid out.
    • Higher Interest Rates: Fixed deposit accounts provide a much higher interest rate as compared to a regular savings account. This benefit is best illustrated in the long run. For instance if a person has RM 100,000 in spare cash, he can either invest it in a savings account that offers a 2% p.a. interest rate or a fixed deposit offering 4% p.a. If the person is looking at gaining an additional RM 4000 per year, he can invest RM 96,000 into a fixed deposit and deposit the remaining RM 4000 into a savings account. This way he will have access to RM 4000 and the interest generated of the RM 96,000 which amounts to RM 3840 will cover any amount utilized from the savings account.
    • Loyalty offers: Like retail outlets offering discounts to frequent shoppers and loyal customers, banks also offer their loyal customers fixed deposits at attractive rates provided the money deposited is fresh funds and not pre-existing funds held by the bank in form of savings accounts. This is done to edge out competition and make that particular bank your primary bank.
    • Safety: Cash deposited in the banks in Malaysia, be it local or foreign come under the protection of PIDM. Perbadanan Insurans Deposit Malaysia is a government agency that protects the money of the bank’s customers in the unlikely event that of the bank’s failure. PIDM covers savings of up to RM 250,000 per person, per bank and if anybody has an amount higher than RM 250,000 they can always split it into different accounts and spread the risk evenly

    Disadvantages of Fixed Deposits

    • Lack of access: The main disadvantage is the lack of access to the investment. Fixed deposits require large sums of money to be deposited as compared to the savings accounts. Deposits into a savings account can be as low as RM 30 whereas a fixed deposit requires money running into the thousands. When emergencies call for a sudden requirement of money most of it may be locked away in a fixed deposit.
    • Passive nature: Fixed deposits are very passive. It does not allow the investor to play an active part in the process of gaining returns and may seem unappealing to some.
    • Slow growth: Even though there may be no risk involved, the growth rate may seem very slow as compared to investing in equities.

    Fixed deposits Calculation

    Fixed deposits can be calculated utilizing an online fixed deposit calculator. This widely available online tool will help assess the investment returns and help on to find out the total value of the FD with the compound interest it offers. These calculators also allow you to compare the different type of fixed deposits available among the banks. The most common types of fixed deposits and how the interest calculation of fixed deposits work are below

    Step-Up Fixed Deposit: This type of fixed deposits offer interest rates at every step or period of the fixed deposit and the advertised interest rate is usually offered only at the last step of the deposit. Hence the effective interest rate offered by the fixed deposit is always lower than that which is advertised. For example, a Bank offers a 6.88% interest on a 6 month fixed deposit but when one views the disbursement of interest it usually 3%b for the first 2 months, 3.15% for the next 2 months, 3.24% for the fifth month and 6.88% for the final month bring the effective interest offered to a mere 3.73%

    Fixed Deposit with CASA Bundling: Fixed deposits are often bundled with a savings account or a current account (CASA). Such bundle offers may advertise higher interests but this bundle would require the investor to open a current account or a savings account and deposit a percentage of the amount invested in the fixed deposit. This leads to investing a higher amount and earning lower than the interest advertised.

    Requirements to open a Fixed Deposit

    • Minimum age of applicant should be 18 years.
    • A minimum initial deposit is required which can be prepared through cash, cheque or online transfer depending upon the bank.
    • Copy of MyKad for identification

    Useful Fixed Deposit Articles

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