Pros and Cons of Fixed Deposits

Fixed deposits are another way to invest your money. Like other investment options, FDs have both advantages and disadvantages. To help you decide if a fixed deposit is right for you, here are some advantages and disadvantages of putting money into a fixed deposit.

Advantages:

Fixed Deposits give guaranteed returns

Unlike the stock market, they do not have price volatility. For example, if you invest $1000 for a year and the interest rate is 1.8% at maturity, you will get $1018 after a year. No more, no less.

Fixed Deposits give higher interest rates than ordinary saving accounts

Fixed deposits generally provide more interest than ordinary savings accounts. As of July 2018, fixed deposits provide up to 1.8% p.a. interest, whilst ordinary savings accounts only provide up to 0.80% p.a. interest.

Fixed deposits are virtually risk free (for smaller deposits)

Unlike other forms of investment, fixed deposits are virtually risk free. So long as the bank does not collapse, you will get your money back in addition to interest. Your deposits are also insured, up to $50,000 even if something happens to the bank, thanks to the Singapore Deposit Insurance Corporation (SDIC).

Fixed Deposit interests are not taxable in Singapore

This means you can keep all the income from FDs, so long as the bank is approved by IRAS.

 

Disadvantages:

There are other forms of investment that give higher returns

The main disadvantage of fixed deposits is that it pays relatively low interest rates. At up to 1.8% p.a., this is considerably lower than other forms of investment such as REITS, stock market trading and real estate (albeit with higher risk). For example, Singapore REITS provide 5-8% p.a. in dividends.

Fixed Deposits interest rates may not increase despite inflation

If inflation rate is higher than the FD’s interest rate, your purchasing power will decrease.

You cannot top up more money into a FD

You’ll have to open a new FD account which can only be done if you have enough money for the minimum.

Fixed Deposits will not yield any benefit if you withdraw early

There is also a maturity date. If the money is withdrawn before the agreed date, you either have to pay a penalty or have its interest forfeited. There may also be a need to give an advance notice.