Understanding Fixed Deposits: What They Are and How They Work

A fixed deposit (FD) is a highly secure and reliable financial instrument designed to offer guaranteed returns over a predetermined period. As a cornerstone of conservative investment strategies, fixed deposits serve as an ideal choice for individuals seeking capital preservation and steady income. 

This predictable and stable return makes FDs an attractive choice for those seeking capital preservation and steady income. With flexible tenure options ranging from a few months to several years, fixed deposits can be tailored to meet both short-term and long-term financial goals. Additionally, FDs offer benefits such as loan facilities against the deposit and options for premature withdrawal, making them a versatile and reliable component of any investment portfolio.

Guaranteed Returns with Fixed Deposits

Fixed deposits (FDs) are a popular and straightforward investment option where you deposit a sum of money with a bank for a fixed tenure. During this tenure, your money earns a predetermined interest rate. Here’s a step-by-step breakdown of how fixed deposits work:

Choosing a Tenure

When you open a fixed deposit account, you choose a tenure or term, which is the period during which you agree to leave your money untouched. Tenures can range from one month to five years. Each tenure comes with its own interest rate, typically increasing with longer terms.

An example from Maybank fixed deposit rates (July 2024):

Calculating Your Returns

Interest on fixed deposits is calculated daily but paid out only at maturity. The longer you leave your money in the FD, the more interest you earn.

Example Calculation:

If you deposit RM10,000 following the above tenure and it’s respective interest rate, your interest earnings at the end of the term will be:

Effective Interest Rate (EIR)

To understand your investment’s true rate of return, you need to calculate the Effective Interest Rate (EIR). For a 6-month FD with an annual interest rate of 2.60% and an investment of RM10,000:

EIR Calculation Example: 

EIR=(Yearly Interest Rate/ 12)×Placement Period in months

EIR=(0.026/ 12) x 6

EIR = 0.013 or 1.3%

Total Interest Earnings:

Total Interest = RM10,000 × 1.3% 

Total Interest =RM 130

This means with an EIR of 1.3%, your RM10,000 investment will earn RM130 in interest over 6 months.

Historical Fixed Deposit Rates in Malaysia

Understanding the historical trends of fixed deposit (FD) rates in Malaysia provides valuable insights into how these rates have evolved and how they might perform in the future. Over the years, fixed deposit rates in Malaysia have reflected the broader economic environment, responding to changes in monetary policy, inflation rates, and global economic conditions.

The 1990s: High Rates Amidst Economic Turmoil

The late 1990s were characterized by notably high fixed deposit rates in Malaysia, often reaching levels exceeding 10%. This period was heavily influenced by the Asian Financial Crisis of 1997-1998. As the crisis unfolded, Malaysia, like many other Asian economies, faced severe economic challenges, including currency devaluation and a loss of investor confidence. In response, Malaysian banks significantly increased FD rates to attract deposits and stabilize the financial system. Higher rates were necessary to encourage savings and maintain liquidity during this period of economic uncertainty.

The 2000s: Recovery and Stabilization

In the early 2000s, Malaysia continued to experience relatively high fixed deposit rates, often exceeding 4%. This was part of the country's strategy to stimulate savings and investment in the wake of the Asian Financial Crisis. The focus was on economic recovery and rebuilding confidence in the financial system. As the decade progressed, the economy began to stabilize, and inflation was brought under control. The high rates of the early 2000s gradually decreased to around 3%, reflecting a return to more stable and predictable monetary policy.

The 2010s: Steady Growth and Moderate Rates

The 2010s saw fixed deposit rates in Malaysia stabilize between 2% and 4%. This period was marked by steady economic growth and moderate inflation. The country's monetary policy was aimed at maintaining stability while supporting economic expansion. Bank Negara Malaysia (BNM) maintained a balanced approach, adjusting the Overnight Policy Rate (OPR) as needed to ensure a stable financial environment. The relative stability of this decade provided a predictable backdrop for investors seeking steady returns from fixed deposits.

The 2020s: Pandemic Impact and Recovery

The COVID-19 pandemic brought unprecedented challenges globally, and Malaysia was no exception. To mitigate the economic impact, BNM reduced the OPR several times, leading to a significant decline in fixed deposit rates, which dropped to historical lows around 1.5% by 2020-2021. These measures were aimed at supporting the economy during a period of severe disruption. As the economy began to recover from the pandemic, fixed deposit rates started to show a gradual increase. This reflects a cautious optimism and a more stable economic outlook. The fluctuations during this period highlight the importance of staying informed and adaptable with investment strategies.

Source: Data.gov.my

While fixed deposits are a safe and reliable way to grow your wealth, they aren’t the only option available. If you have a long-term horizon until retirement and can handle higher risk, consider diversifying your portfolio with investments in stocks, mutual funds, or other financial instruments.

Can You Withdraw Funds Early?

When you withdraw your money before the FD tenure ends, you could lose part or all of the interest you have accrued. Banks impose penalties for early withdrawal, which can significantly reduce the returns on your investment. In some cases, the penalty might be so substantial that you forfeit the entire interest earned, and in extreme situations, you might even lose a portion of your principal amount.

Therefore, before placing a large sum of money into a fixed deposit, it’s crucial to consider your future financial needs. Ask yourself if you will need access to these funds in the foreseeable future. Proper planning can help you avoid the need for premature withdrawal and the associated penalties. Align your FD tenures with your financial goals and liquidity requirements to ensure that your money remains accessible when needed.

Strategies to Mitigate Early Withdrawal Penalties

A strategy to mitigate the risks associated with early withdrawal is fixed deposit laddering. This involves spreading your investment across multiple fixed deposits with different maturities.

Example:

• Total Investment: RM30,000
• RM10,000 in a 6-month FD
• RM10,000 in a 1-year FD
• RM10,000 in a 2-year FD

By laddering your FDs, you ensure that a portion of your investment matures at regular intervals. This provides greater flexibility and accessibility to your funds, reducing the likelihood of needing to break an FD prematurely.

Benefits of Laddering:

1. Improved Liquidity: Having FDs maturing at different times ensures that you have regular access to a portion of your money.
2. Interest Rate Optimization: Laddering allows you to take advantage of potentially higher interest rates for longer tenures while still keeping some funds accessible in the short term.
3. Risk Management: This strategy spreads the risk across multiple deposits and tenures, making your investment portfolio more resilient to changes in interest rates and financial needs.

Difference Between Fixed Deposit and Savings Account

Both fixed deposit (FD) accounts and savings accounts are popular choices for growing your money with low risk. However, they serve different financial purposes and offer distinct features. Some of the key differences include:

1. Interest Rates

One of the most significant differences between FDs and savings accounts is the interest rate. Fixed deposit accounts generally offer much higher interest rates, ranging from 2.0% to 3.0% per annum. Savings accounts, on the other hand, usually offer lower interest rates, from 0.05% to 1.5%.

2. Access to Funds

Savings accounts provide instant access to cash, allowing you to withdraw funds at any time without penalties. In contrast, FDs require you to lock in your money for a fixed period, and early withdrawal can result in loss of interest earned.

3. Minimum Deposit

FD accounts usually require a higher initial deposit, starting from RM500 or RM5,000, whereas savings accounts can be opened with a minimum deposit as low as RM20.

4. Placement Period

FDs have a fixed tenure, ranging from one month to five years, during which the principal and interest are paid out at maturity. Savings accounts, however, have a continuous nature with no fixed term and can be closed at any time.

5. Frequency of Deposits

For FDs, the amount is deposited only once, though the account can be renewed with fresh funds upon maturity. Savings accounts allow for any number of deposits at any time, with no restrictions.

6. Cash Withdrawals

FDs discourage withdrawals before the end of the tenure, as it results in account termination and loss of interest earnings. Savings accounts allow withdrawals at any time, subject to withdrawal limits.

Exploring Different Types of Fixed Deposits

Fixed deposits (FDs) come in various forms, each tailored to meet specific financial needs and goals. Understanding these different types can help you choose the best option for your investment strategy.

1. Conventional Fixed Deposit

A conventional fixed deposit is the most straightforward type. You deposit a lump sum for a fixed tenure, and interest is paid at maturity. This option is ideal for those seeking simplicity and guaranteed returns without any intermediate withdrawals.

2. Maturity Returns Fixed Deposit

In a maturity returns fixed deposit, the interest is accumulated and paid out at the end of the deposit term. This option suits those who prefer receiving their interest in a lump sum.

3. Monthly Returns Fixed Deposit

This type of FD pays out the interest earned on a monthly basis. It is ideal for investors looking for a regular income stream from their investment.

4. Security Deposit

A security deposit FD is typically linked to a loan or credit facility. The deposited amount acts as collateral, providing security to the lender.

5. Foreign Currency Fixed Deposit

This FD type allows you to deposit funds in foreign currencies. It is useful for investors looking to hedge against currency fluctuations or those with foreign income.

6. Junior Fixed Deposit

Junior fixed deposits are designed for minors. These accounts encourage saving habits in children and often come with special interest rates or benefits.

7. Senior Citizens’ Fixed Deposit

Senior citizens’ FDs offer higher interest rates to cater to the financial needs of retirees. These accounts help provide a stable income source for senior citizens.

What are the Pros and Cons of Fixed Deposits

Fixed deposits (FDs) are a popular investment option known for their safety and guaranteed returns. However, like any financial product, they come with both advantages and disadvantages. Understanding these can help you make an informed decision about whether FDs are the right choice for your financial goals.

Pros of Fixed Deposits

1. Low Risk

Fixed deposits are one of the safest investment options available. Unlike the stock market or unit trust funds, FDs offer guaranteed interest returns, protecting your principal from market fluctuations.

2. Insured Deposits

Your money in a fixed deposit is insured. In the unlikely event that your bank fails, Perbadanan Insurans Deposit Malaysia (PIDM) will reimburse you for the amount deposited, up to RM250,000. This provides an additional layer of security and peace of mind.

3. Higher Interest Rates

Compared to savings accounts, fixed deposits typically offer higher interest rates. This means your money can grow faster in an FD, making it a more attractive option for those seeking stable returns.

4. Accessibility

While fixed deposits are meant to be held until maturity, they do offer the flexibility to withdraw funds if needed. However, it's important to note that withdrawing before the end of the tenure might result in a loss of some or all of the interest earned.

Cons of Fixed Deposits

1. Potential Loss of Interest

One major drawback of FDs is the potential loss of interest if you need to withdraw your money before the tenure ends. Fixed deposits are not as flexible as savings accounts in this regard, and early withdrawal can lead to forfeiting the accrued interest.

2. Lower Returns Compared to Other Investments

While fixed deposits offer higher returns than savings accounts, they generally provide lower returns compared to other investment options. For younger investors or those willing to take on more risk, other investment avenues, such as stocks or mutual funds, might yield higher returns over time.

3. Limited Flexibility

FDs require you to lock in your money for a fixed period, which can limit your financial flexibility. This lack of liquidity might not be suitable for those who may need quick access to their funds.

Are My Investments Safe?

When it comes to the safety of your wealth stored in a fixed deposit account, you might wonder if it's truly secure. The short answer is: yes, your investments are well-protected.

Protection by PIDM

In Malaysia, cash deposited in local or foreign banks is protected and insured by the Perbadanan Insurans Deposit Malaysia (PIDM). PIDM covers deposits in regulated Malaysian commercial banks, providing a safety net in case a member bank fails. This protection is automatic and free of charge, covering up to RM250,000 per depositor per bank.

Due to this, it is prudent to open fixed deposit (FD) and current account savings accounts (CASA) with different banks to spread the risk. Additionally, joint accounts can also provide separate deposit insurance, further protecting your funds.

Protection for Co-operative Banks

Co-operative banks in Malaysia, which primarily provide loans to farmers and small businesses, are protected under the Development Financial Institution Act 2002 (DFIA) by the Ministry of Finance. Although DFIA focuses on financial system stability rather than specific deposit insurance, co-operative banks like Bank Rakyat and AgroBank guarantee a 100% return on savings and investments, including both principal and interest.

Islamic Deposit Accounts

For those adhering to Islamic laws, Mudharabah General Investment Accounts (GIAs) offer a Sharia-compliant alternative to conventional FDs. Under the Islamic Financial Services Act 2013 (IFSA), Islamic banks must now classify deposits into principal guaranteed or investment accounts. This means your deposits are protected and guaranteed while remaining Halal.

How to Identify the Best Fixed Deposit Rates in Malaysia

Finding the best fixed deposit (FD) rates in Malaysia can significantly enhance your investment returns. By leveraging various promotions and strategic deposit placements, you can secure the highest possible interest rates for your savings. Here’s how to navigate the landscape effectively.

Fresh Deposits Promotion

Banks often offer higher interest rates for new or "fresh" deposits as a way to attract more funds. These promotions typically provide better rates than the standard FD offerings, making them an excellent opportunity for new investors.

Example:

• Promotion: Alliance Personal Welcome Offer
• Requirement: To qualify, be a new Alliance Personal customer with a minimum Net Investable Assets Under Management (NIA AUM) of RM100,000 in deposits and/or investments, open either an Alliance SavePlus Account/-i or Alliance Hybrid Account/-i with a minimum deposit of RM10,000, and make the placement within 30 days of tagging as Alliance Personal.
• Benefit: Enhanced return of 3.80% p.a. for 6 months

To take advantage of these promotions, keep an eye on announcements from various banks and be ready to transfer your funds quickly when a good rate is offered.

Bundle Promotions

Another effective strategy is to look for bundle promotions, where banks offer higher FD rates when combined with other products or services. This could involve signing up for a credit card, purchasing insurance, or opening a current or savings account.

Example:

• Promotion: RHB Bank Unit Trust & Fixed Deposit/Commodity Murabahah Deposit-i (UTFD/CMD-i)
• Requirement: Minimum Fixed Deposit/Commodity Murabahah Deposit-i Placement of RM 30,000 and minimum investment of RM 30,000
• Benefit: 1 month 15.2% p.a. or 3 months 7.55% p.a.

To truly optimize your FD returns, consider combining fresh deposit promotions with bundle promotions. This approach can significantly enhance your earnings and provide added financial benefits.

Best Fixed Deposit Rates in Malaysia

Finding the best fixed deposit (FD) rates in Malaysia can significantly enhance your investment returns. Staying informed about current FD rates is crucial, and one of the best resources to use is StashAway's Malaysia Fixed Deposit Rates page. This page provides up-to-date information on FD rates offered by various banks.

Top Fixed Deposit Rates in Malaysia by Tenure

Here’s a summary of the top FD rates in Malaysia based on different tenures:

Wrapping Up: Should You Invest in Fixed Deposits?

Deciding whether to invest in fixed deposits depends on your financial goals, risk tolerance, and investment horizon. Fixed deposits offer security and predictability, making them ideal for conservative investors seeking guaranteed returns.

If you value the safety of your principal and the assurance of insured deposits, fixed deposits are an excellent choice. They are particularly suitable for short to medium-term goals, providing a reliable income stream with minimal risk. With various options available, including conventional, promotional, foreign currency, and Islamic fixed deposits, there is a product to meet every investor's needs.

However, for long-term wealth accumulation, consider balancing your portfolio with higher-yielding investments like stocks and mutual funds. These can offer greater returns, essential for long-term financial growth.

In conclusion, fixed deposits are a valuable part of a diversified investment strategy. They provide a stable financial foundation while allowing you to explore other investment opportunities. Stay informed about the latest rates and promotions to make the best choices for your unique financial situation.