What Is Fixed Deposit? How Do Fixed Deposits Work?
Fixed deposit, or commonly referred to as “FD” in Malaysia, is a type of bank savings or investment account that promises the investor a fixed rate of interest. In return, the investor agrees not to withdraw or access his / her funds for a fixed period of time.
In a fixed deposit investment, interest is only paid at the very end of the investment period. This is unlike regular savings accounts, where interest is calculated daily and typically paid to you at the end of each month. Because the investment term and interest rate are fixed, you can very easily calculate the amount of interest you will earn at the end of any fixed deposit investment.
How do fixed deposits work?
With a fixed deposit, one of the most unusual characteristics is that funds cannot be withdrawn for a fixed period of time.
Fixed deposit term can vary anywhere from one month to five years.
When you invest in a fixed deposit investment, you are usually presented with different “tenure” or term options e.g. one month, three months, six months, one year etc.
Each “tenure” or term comes with a predetermined interest rate. For example, banks normally quote their fixed deposit interest rates in a table similar to the one below:
What this means is should you choose to invest in a fixed deposit with a 3 month term, you will be entitled to an interest rate of 3.05% p.a. at the end of three months.
If you invest RM10,000 for 12 months with the interest rate of 3.15%, you will get a return of RM319.59 at the maturity of your fixed deposit.
The interest rate can go higher than the standard rate if you invest a larger sum of money, for example RM10,000. If you are looking for higher returns, you need to be on the look out for fixed deposit promotions by all the banks in Malaysia. Sometimes, the promotional rate can go as high as 4.00% for 12-month tenure.
When your fixed deposit has matured, you are free to move your fund to fixed deposit offered by other banks with better rates.