As a beginner investor, one of the safest and most straightforward options to grow your savings is through fixed deposits. In Singapore, fixed deposits are a popular choice among individuals looking to secure their funds while earning a modest return. If you’re considering starting a fixed deposit account, this comprehensive guide will walk you through all the essential aspects to help you make informed decisions.
What is a fixed deposit?
A fixed deposit is a type of savings account offered by banks and financial institutions where you deposit a certain amount of money for a fixed period at a predetermined interest rate. Unlike regular savings accounts, fixed deposits have a maturity period, which ranges from a few months up to several years. During this tenure, the deposited amount remains locked, and you cannot withdraw it without incurring penalties or forfeiting the interest earned.
Benefits of fixed deposits
Fixed deposits offer several advantages that make them an attractive option for many investors, especially beginners.
Safety: Fixed deposits are considered low-risk investments as they are typically insured up to S$75,000 under the Singapore Deposit Insurance Corporation (SDIC) scheme.
Stability: The interest rates on fixed deposits are fixed at the time of opening the account, providing stability and predictability.
Ease of Use: Setting up a fixed deposit account is a straightforward process, and you can do it online or by visiting a bank branch.
Higher Interest Rates: Fixed deposits generally offer higher interest rates compared to regular savings accounts, allowing your money to grow faster.
Flexible Tenures: You can choose a tenure that best suits your financial goals, ranging from a few months to several years.
Disadvantages of fixed deposits
While fixed deposits offer many benefits, there are also some cons and limitations associated with this investment option in Singapore. As a potential investor, it’s crucial to consider both the pros and cons before deciding whether fixed deposits align with your financial goals. Here are some of the downsides of fixed deposits in Singapore:
Lower Returns: Fixed deposits generally provide lower returns compared to other investment options like stocks, mutual funds, or real estate. While they offer stability and safety, the interest rates may not keep pace with inflation, potentially resulting in a loss of purchasing power over time.
Lack of Liquidity: Fixed deposits have a fixed tenure, and the money is locked in for the agreed-upon period. Withdrawing the funds before the maturity date usually comes with penalties and reduced interest earnings, making it less liquid compared to other types of savings accounts.
Interest Rate Fluctuations: The interest rates on fixed deposits are fixed at the time of opening the account. If interest rates rise during the tenure of your fixed deposit, you may miss out on potentially higher returns available in other investment instruments.
Opportunity Cost: By committing your funds to a fixed deposit, you may miss out on potential investment opportunities that could generate higher returns over the long term. For example, if you have a high-risk tolerance and a long investment horizon, investing in the stock market may offer better growth prospects.
Read more: All You Need To Know About Treasury Bills
Which bank should I choose?
Take into account the various factors that play a part in determining your bank of choice. Consider the amount of funds you intend to deposit, as well as the time period. However, the banks’ board rates for fixed deposits typically do not change much, although the promotional interest rates could differ from time to time.
Nonetheless, here’s a quick comparison of the different banks in Singapore to get you started, illustrated based on a 12-month period.
|Bank||Board Rate||Promotional Rate|
|Bank of China||1.70%||3.50% – 3.55% Depending on whether account is being opened over the counter, or via mobile banking|
|CIMB||0.30% – 0.35% Minimum deposit of S$5,000||3.15% Minimum deposit of S$10,000|
|Citibank||0.10% Minimum deposit of S$10,000||Not applicable|
|HSBC||0.15% Minimum deposit of S$5,000||3.45% For existing customers, with minimum deposit of S$30,000|
|Maybank||0.35% Minimum deposit of S$1,000||3.65% Minimum deposit of S$20,000|
|OCBC||0.50% Minimum deposit of S$5,000||Not applicable|
|RHB||0.40% Minimum deposit of S$20,000||3.68%|
|Standard Chartered||2.60%||Not applicable|
|UOB||2.30% Minimum deposit of S$5,000||Not applicable|
Impact of early withdrawal
Fixed deposits are designed to be held until maturity. However, circumstances may arise when you need access to the funds before the tenure is complete. In such cases, early withdrawal is possible but usually comes with penalties. The bank may deduct a portion of the interest earned, resulting in a lower return than initially expected.
Before opening a fixed deposit account, it’s essential to be aware of the early withdrawal policies of the bank you choose, as they can significantly impact your returns.
Diversification is key
While fixed deposits offer stability and safety, it’s essential to remember that they might not provide the highest returns compared to other investment options. As a beginner investor, diversification is essential to optimise your portfolio’s performance. Consider exploring other investment avenues, such as stocks, bonds, mutual funds, and real estate, to achieve a well-rounded and diversified investment strategy.
As your financial knowledge grows, you can explore other investment opportunities to build a robust and diversified portfolio that aligns with your long-term financial objectives. Happy investing!
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