Should You Still Keep Money In Fixed Deposits, When Rates Are So Low?

Should You Still Keep Money In Fixed Deposits, When Rates Are So Low?

A few years ago, you could get 4% returns p.a. on your fixed deposit. But in 2021, you’d be lucky if your bank offers you anything above 2%. With fixed deposit returns barely covering inflation, are they still worth the effort? Let’s dive in.

Interest rates are at an all-time low

Last year, Bank Negara Malaysia reduced the Overnight Policy Rate (OPR) four times, to an all-time low of 1.75%. This was to help the economy recover from the impact of the COVID-19 pandemic. While this is good news for borrowers taking out loans (as you pay lower interest rates), it also means reduced interest rates for fixed deposits and savings accounts.

Fixed deposits still make sense in these situations

Despite low returns, fixed deposits are great at being two things: safe and predictable.

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Your fixed deposit is guaranteed to grow at predetermined rates, so you’ll know exactly what you’re getting. Fixed deposits are also automatically protected by Perbadanan Insurans Deposit Malaysia (PIDM). This means that in the unlikely event that your bank fails, PIDM will reimburse you with the money you have deposited, up to RM250,000.

Besides that, you can instantly access a fixed deposit any time. If you’ve placed an online deposit, you won’t even need to go to the bank to withdraw it – you can get your money transferred within minutes through online banking (although you might incur an interest penalty for ending the tenure early).

So a fixed deposit makes sense for you if:

  • You are retired or going to retire. You may no longer be able to invest in risky assets, as you won’t have time to recover from big losses. You may have to keep a portion of your savings in fixed deposits.
  • You need to use your money soon. If you’re saving for a short-term goal – say, a down payment for a new car or a master’s degree next year – you need somewhere safe to keep your money, so you can use it when the time comes.
  • You need somewhere to keep your emergency savings. Your emergency savings generally have to cover at least six months of living expenses, and must be instantly accessible. This is usually kept in a fixed deposit or savings account.

On the other hand, a fixed deposit may not make sense if you are using it to store all your savings. Currently, fixed deposit returns can just help cover inflation, and not much else.

If you can afford to do so, consider diversifying into other investments. As a younger investor, keeping most of your savings in fixed deposits means losing out on potentially higher returns, and not being able to meet future financial goals. And if you’re an older investor who wants to preserve your money, you can also try other low-risk investment options that may deliver better returns.

How to improve returns on your savings

Here are a few ways you can get more out of your savings:

1. Switch to a higher-return fixed deposit

Look for other banks that could give you better rates. Use our handy fixed deposit comparison page to quickly discover the best rates and estimate your returns.

Besides that, some banks run seasonal fixed deposits promotions. Here are a few to look out for:

BankPromo untilMinimum depositInterest rate (p.a.)
Hong Leong Bank eFixed Deposit/eFixed Deposit-iMarch 31, 2021RM10,0002.35%
CIMB eFixed DepositJan 20, 2021RM5,0002.20%
Affinbank Combo Special CampaignJan 19, 2021RM10,0002.18%
Interest rates shown are for six-month tenures; accurate as of January 2021

2. Fixed deposit laddering

Fixed deposit laddering is a strategy that spreads out your money across different tenures – this gives you more flexibility when accessing your money, and helps you take advantage of the best rates.

To set up an initial ladder, you could spread out your money like this:

  • Fixed deposit 1: RM5,000 in a one-year tenure
  • Fixed deposit 2: RM5,000 in a two-year tenure
  • Fixed deposit 3: RM5,000 in a three-year tenure
  • Fixed deposit 4: RM5,000 in a four-year tenure

At the end of each tenure, you’ll renew each fixed deposit into four-year tenures. This means that each fixed deposit will have a four-year tenure which takes advantage of better rates, as banks offer higher rates the longer your tenure. You’ll also have a fixed deposit that matures at the end of every year, so you can easily access your money without incurring a penalty for cancelling your tenure.

When setting up a fixed deposit ladder, the tenure is up to you – you can set up shorter tenures (of one-month, two-months, etc.) depending on how accessible you want your funds to be. If you foresee interest rates rising soon, you could also choose shorter tenures so that you’re not locked in to lower rates. On the other hand, if you foresee interest rates declining further, choosing longer tenures can help you lock in better rates. As of January 2021, economists think that Bank Negara will not likely reduce the OPR this year.

3. Look for low-risk investments

Fixed deposits aren’t the only place to put your money in, even if you value safety. You could also consider these low-risk investments:

  • Money market or cash management fund. These unit trust funds invest in short-term debts that are loaned to banks and the government. There is very little risk involved in these funds. In the past five years, these funds delivered around 2.78% to 3.45% returns per annum (according to funds listed on Fundsupermart). Alternatively, platforms like Stashaway Simple invests in a cash management portfolio for you, and has a projected return rate of 2.4% per annum.
  • Bonds. A bond is a debt security issued by governments or companies who want to raise money. When you buy a bond, you’re lending money to the issuer, in return for interest payments. Buying a bond directly from a bank costs RM250,000, but regular investors can buy bond exchange traded funds (ETFs) on the stock market or bond unit trust funds. The best-performing funds on Fundsupermart have delivered annual returns of over 6% in the past five years.
  • ASB/ASM. Amanah Saham Bumiputera (ASB) and Amanah Saham Malaysia (ASM) have historically delivered decent returns. They’re considered low risk because the price of each unit is fixed at RM1. You can also easily withdraw your investments any time.
  • High-yield savings account. Technically not an investment, but high-yield savings accounts can deliver returns of over 4%. But the catch is that you’ll have to jump through a few hoops to be eligible for the best rates – this could mean spending a certain amount, meeting a savings requirement or buying insurance products through the bank.

4. Diversify into higher-risk investments

If you are young and have a high risk tolerance, you should not be saving all your money in fixed deposits. You could put some of your savings in higher-risk investments for better returns (but avoid investing your emergency savings). This could mean investing in stocks, ETFs, REITs and unit trust funds. You could also use a robo advisor like StashAway to estimate your risk profile, and help you invest in appropriate assets. Check out our RM1,000 investment guide for a rundown on these options.

Fixed deposits still have a place

In short, fixed deposits probably still play a role in your personal finance journey, especially if you are older and need to preserve your savings. To get the best returns, look for banks with better rates and use a laddering strategy. Just remember that you don’t have to keep all your savings in a fixed deposit – there are other low-risk investments available, and if you can afford the risk, you can also consider higher-risk ones.

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