3 benefits & drawbacks of fixed deposits to consider before opening an account
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PUBLISHED ONMarch 26, 2022 12:30 PMBySHREYA VARADARAJAN
You might have heard that fixed deposit bank accounts are a good option for low-risk investment, but you might not be sure if it's the most suitable option for you.
After all, there are also several other investment alternatives to choose from - how do you decide if fixed deposits are the one for you?
Fixed deposit accounts are simple: You put in a preferred amount of money into your account for a selected period of time and withdraw this amount with its accumulated interest at the end of the selected term.
For individuals who require a low-risk and low-maintenance way for capital growth, putting money into fixed deposit bank accounts might be a suitable choice for you.
Before you decide, however, you have to know a few things, including factors such as liquidation policies and interest rate differences.
| Pros | Cons |
|---|---|
| Low-risk and reliable investment option | Other investment options have higher return rates |
| Convenient banking arrangement | Early withdrawal from FD account forgoes interest |
| Diversifies your investment portfolio | Not the best option for long-term savings with a moderate sum of money |
Benefits of fixed deposit accounts
Generally, fixed deposit accounts are beneficial if you are looking for the following things:
1. A low-risk and reliable investment option
Fixed deposits are one of the lowest-risk investment options available due to the guaranteed returns and fixed interest rates.
When you deposit your capital in a fixed deposit account, you will get back your initial deposit sum at the end of the stipulated period of time no matter what, which allows you to invest and grow your capital with minimal risks of losing money.
Losing your initial deposit might only happen in the case of the bank shutting down, which is highly uncommon.
However, do note that foreign currency fixed deposit accounts are more vulnerable to fluctuations and risk.
Typically, the initial interest rate offered for your fixed deposit account will also be maintained throughout the stipulated period, which means that you will not have to worry about banks' shifting interest rates affecting your gains.
Furthermore, most banks offer promotional fixed deposit rates at certain times throughout the year - if you catch the best promo available, you stand a chance to increase your earnings as well.
2. Convenient banking arrangements
Unlike typical savings accounts and other higher-risk investment options, fixed deposits are an extremely low-maintenance way to grow your capital.
They do not require extra bank fees or constant check-ups regarding fluctuating interest rates or other changes.
You can simply deposit your capital and leave it to accumulate steady interest, making it a convenient and stress-free option.
Individuals who want to grow their money but do not have the time to monitor or keep abreast of stock market conditions might find this an attractive benefit.
3. Diversify your investment portfolio
If you're looking to diversify and strengthen your investment portfolio, investing in a fixed deposit account might be a great way to do so without exposing yourself to the volatility of other higher-risk investment options.
As a low-risk option that offers guaranteed returns unlike other types of investments like equity investment, fixed deposits are a great way to balance out your portfolio's risk level by providing a reliable stream of capital growth.
Fixed deposits are also a great way to increase your finances for a short-term goal, as it offers great returns on large amounts of capital even within short periods of time.
Drawbacks of fixed deposit accounts
While fixed deposits are undoubtedly a great investment option for those looking for a convenient and low-risk method to grow their capital, they might not be as suitable if you are looking for any of the following things:
1. Not the highest return rates in the market
While it is true that fixed deposits in general offer higher interest rates than most savings accounts, there are other investment options that offer higher returns.
Even amongst other similar low-risk investment options, alternatives like the Singapore Savings Bond (SSB) have higher interest rates.
If your main focus is on maximising capital growth and you are willing to navigate higher risk levels for this, other investment options like stock market or real estate trading also offer much higher returns than fixed deposits.
But if you want a low-risk investment option with minimal maintenance requirements, fixed deposits are the option for you.
READ ALSO: 3 types of bank accounts you should consider opening this new year
2. Withdrawal penalty
While fixed deposits allow you to withdraw your funds any time you wish, you will be forgoing your accumulated interest amount in doing so.
Some banks might also impose additional penalty fees for withdrawals that are done prior to the completion of the chosen time period.
In contrast, other options like normal savings accounts or investments with the SSB allow you to withdraw your money whenever you wish without penalty or any forgoing of your returns.
Fixed deposits might only be a better option if you're planning to leave your capital untouched throughout your selected time period.
3. More profitable for larger capital
Unlike similar low-risk investment options like SSB which have maximum deposit amounts of $200,000 and below, fixed deposits allow large amounts up to $500,000 and above.
Fixed deposits' return rates are also the most profitable for large capital sums over a short period of time.
| Interest rates (p.a.) | Min. deposit amount | Max. deposit amount | |
|---|---|---|---|
| SSB | 1.91% | $500 | $200,000 |
| DBS/POSB (fixed deposit) | 0.6% | $1,000 | $1,000,000 |
| Maybank (fixed deposit) | 0.1% to 0.6% | $1,000 | $1,000,000 |
| UOB (fixed deposit) | 0.6% to 0.8% | $20,000 | $1,000,000 |
SSB has higher interest rates and lower minimum deposit amounts than what the typical fixed deposit bank account offers, making it a better option if you would like to grow a smaller amount of money over a longer period of time.
These options would also allow you to make withdrawals as you wish, making them more sustainable choices for the long run.
However, fixed deposits have much higher maximum deposit limits, making them the most suitable option for investing larger amounts of money.
If you are looking to invest a large sum over a short tenure period, fixed deposits remain the best option out there.
Fixed deposits - are they the right option for you?
Fixed deposits' strength lies in their convenience, reliability, and low risk.
If you would like to grow your capital in a safe and low-maintenance environment, fixed deposits might be your best bet.
They have higher interest rates than most savings accounts and require no extra fees or maintenance while offering guaranteed returns on your capital.
Fixed deposits are also a great way to diversify your investment portfolio and balance out its risk factor.
This article was first published in ValueChampion.