It’s really not hard to see why time deposits are so common as an investment choice especially for first-time investors. Time deposits can provide a better return on extra cash than a typical savings bank, with low risk. In this article, we would discuss more about the advantages and disadvantages of a time deposit account.
In case we’re not all on the same page, let’s first talk about the definition of time deposits. Known as “termed deposits” or “fixed deposits” in some countries, this investment product requires an individual to put aside a certain amount of money with a bank – without withdrawals – over a fixed period of time. In return, the bank makes an interest payment over this fixed period, which is generally at a higher rate than what you would otherwise get from a normal savings account.
Why to have a time deposit account?
Higher interest rates
The interest rates offered vary by banks or financial institutions you’ll use for your fixed deposit account, with some banks offering a higher rate than others. However, in general, almost all banks offer comparatively higher interest rates for time deposits relative to normal savings account.
Regular earning potential
The deposit earns you interest (and higher interests at that) over regular fixed intervals such as monthly or quarterly (at times, yearly). Some banks allow you to have the earned interest deposited or transferred to your preferred account – which means while you do not have access to your entire time deposit savings, you will however have regular cash-flow in the form of periodic interest payments. This option makes attractive investment product for why many retirees.
Safest kind of investment
Not everyone is willing to risk their money in stock market, property investment, or other risky investments. Firstly, the learning curve is steeper: there is a lot to learn if you want to be a professional stock investor. On the other hand, a time deposit gives you the chance to be a passive investor, i.e., invest and just, and wait for your returns. It is also worth mentioning here that most financial institutions / banks that offer time deposits are relatively stable, and regulated by government. Time deposits in Singapore are also protected by the Singapore Deposit Insurance Corporation Limited (SDIC), which is established to protect Singaporeans against the loss of their deposits placed with banks in the unlikely event of a bank failure.
The down side to time deposits
Time deposits also have some disadvantages that often cause people to pass them over.
Safe but lowest income-earning investment
We’ve already looked at why time deposits are the safest investments. However, the trade-off is that they are also one of the lowest profit-generating investments. Investment experts would often tell you though that the elimination of risk in time deposits is worthwhile, however as interest rates in Singapore are quite low, there is limited earning potential offered by fixed deposits. Furthermore, when it comes to time deposits, you should not be looking only at the monetary value of your returns. Instead, the intangible benefits in the form of security should also take into account (i.e. peace of mind!).
No active participation from the investor
Some people don’t like to stay passive when it comes to their investments. If you belong to this category, time deposits probably won’t be appealling to you. However, the fact that a time deposit investment doesn’t require active investor participation may actually be a positive thing as it minimizes mistakes and hence losses.
Ready to start investing in fixed deposits? Check out which bank in Singapore offers the highest interest rate!
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