Fixed deposits: The practical way to learn the first rule of investing: Don't lose money!

Investing in fixed deposits will not get you rich at current interest rates. But it goes a long way for you to implement the fundamental rule of investing:

DON'T LOSE MONEY!

Growing your investible savings from investing

In my other blog "Five Cents Ten Cents" on financial freedom, I talk about living within your means, saving and investing and leveraging on the power of time and compound interest to grow your investible savings towards financial freedom. As the recent bear markets around the world's stock markets (including the Singapore Exchange) have proven, if you put 100% of your investible savings in just one asset class such as equities (stocks and shares), you are at risk to the market turbulence that hits equity markets periodically as bulls and bears take turns to rule on the stage.

One of the easiest way to diversify the risk of investing in just one asset class is to have some portion of your investment portfolio in a relatively low risk asset such as fixed deposits. While the recent interest rates for fixed deposits hover around 1.5% to 2%, this still beats the double-digit negative returns from investing in the stock market.

Points to consider before investing in fixed deposits

Investing in fixed deposits is relatively straightforward. You generally need to have the minimum amounts of $5,000 or $10,000 (or lower depending on the bank) and basically place this with a bank for a period of a few months to one to two years. The thing to consider about fixed deposits is liquidity vs interest rates. In general, the larger your principal amounts placed, the higher the interest rates. The longer the period of your fixed deposit, the higher the interest rate. This is because the banks would like to have you place your money with them for a longer period so that their processing costs are lower and also prefer to accept bigger principal amounts.

Here are some considerations before you place your fixed deposit with the bank of your choice:

1) Determine your principal amount to place
This should be derived after considering your cash flow needs. For instance, if you are expected to pay for a big ticket purchase e.g. LCD TV next month and would need the cash, it wouldn't make sense to put all your cash into fixed deposits for 1 year unless you have spare cash to make that payment.

2) Determine the tenure and interest rate
The interest rate offered as well as the tenure (i.e. length of time for the fixed deposit) should consider also your cash flow needs. Typically a longer tenure attracts a higher interest rate but some banks charge a penalty of loss of interest or additional fees if you do an early uplift of fixed deposit. Hence, you need to go for longer tenures if you have other sources of cashflows coming in and are reasonably confident that you won't need the cash set aside for the 1 year or 6 month fixed deposit.

The tenure is also dependent on whether you think interest rates are going UP or DOWN. If you hold the view that interest rates will go UP, then you may want to place fixed deposits for shorter tenures, say 3 months, and then renew at the higher rate either with the same or different bank. If you hold the view that interest rates are going DOWN, then you may want to "lock-in" the interest for 1 year. In reality, no-one can predict with any degree of certainty interest rate movements so your guess is as good as mine. There is no right/wrong answer.

3) Determine the bank
Different banks offer different freebies or services to customers. Nowadays, internet banking allows some banks to offer fixed deposit placement using internet banking without having to go down to a branch. This is largely a personal choice. However, from experience, local banks i.e. DBS, UOB, OCBC tend to offer lower fixed deposit rates compared to say Maybank, Bank of India etc. So if you want to look for slightly higher interest on fixed deposits, you may want to consider the foreign banks. Do note that all banks that can accept fixed deposits are licenced by the Monetary Authority of Singapore and are subject to the Deposit Insurance Scheme, hence they are safe from the eyes of the authorities. Some people still have the perception that foreign banks are not safe and prefer to bank with the local big boys. Decide for yourself and place your fixed deposits accordingly.

Have fun shopping for the best fixed deposit rate deals in town.

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