Fixed deposit variants explained

June 3, 2014

For building a solid savings and cash buffers – the interest rates on an fixed deposit can’t be beat. But are they all made the same?

By Chester John

Fixed deposits are an alternative to the regular savings accounts that offer additional interest in exchange for less withdrawal flexibility. For building a solid savings and cash buffers – the interest rates on an FD can’t be beat. But are they all made the same?
 
The standard fixed deposit


Here’s how a standard fixed deposit looks like:

6-month Fixed Deposit A	Interest Rate at 3.65% p.a.
Deposit Amount (RM)	6-month Interest (RM)
5000	90.43
20000	361.73
50000	904.32

 
With the fixed deposit featured in the example above, all you have to do is deposit money into the account for 6-months and upon maturity, you will get your initial deposit (principal) back along with interest of 3.65% p.a.
 
Fixed deposit variations
Ever see banks advertise absurdly high interest rates on their fixed deposit promotions?
Most of the time, there’s usually some sort of catch, and without even going into the mechanics of the promotion, a strong tell- tale sign shows itself when they use the phrase earn up to X% p.a..

There are generally two main types of methods banks use in order to inflate the interest rate of their product during a promotion: by stepping up the interest rates and bundling the FD with a current or savings account (CASA). These are more commonly known as Step-Up and CASA Bundling respectively. Some FD promotions may even include both Step-Up and CASA bundling.

There is a third method where the fixed deposit is linked to some sort of investment program but we will not be covering that in this article.
 
Step-up fixed deposit
Think of a step-up FD as a staircase.

The tenure of fixed deposit placement is split into different sections, with different interest rates assigned to them, each getting progressively higher. In this case, the advertised rate usually only affects the final month (or section) of the tenure. As such, the effective interest rate will always be lower than the advertised rate. For example, Bank A’s Campaign boasts an interest of up to 6.88% p.a. for a 6-month Fixed Deposit market but a closer look shows this:

	Month 1-2	Month 3-4	Month 5	Month 6	Total
Interest Rate (p.a.)	3.00%	3.15%	3.24%	6.88%	3.73%
Interest Earned on RM10,000 (RM)	49.39	52.08	26.88	56.31	184.66

 
As you can see from the table above, the 6.88% p.a. offered only affects the 6th and final month of the tenure. Calculating the effective rate gives you 3.73% p.a. for the 6-month period.
 
Fixed deposit with CASA bundling
This kind of fixed deposit requires you to put some money into a CASA account as well. This is on top of whatever you choose to put into your FD. The amount you have to put into your CASA account is usually a predetermined fixed amount or a percentage of your FD amount.

It may be possible to be swayed by an attractive FD rate, but don’t forget that you are actually depositing your money into a CASA as well which usually generates a very poor interest rate. In general, the more you have to put into your CASA, the lower your effective rate will be (since the CASA rate will offset the FD rate more significantly).

	6-month Promo FD	6-month CASA	Total
Initial Deposit (RM)	10000	5000	15000
Interest Rate p.a.	4.28%	0.5%	3.01%
Interest Generated (RM)	211.76	2.50	214.25

 
For example, Bank B advertises an interest rate of 4.28% p.a. for their 6-month FD.

However, the requirement is that you have to deposit 50% of your FD amount into a CASA as well. This means that if you want to deposit RM10,000 into the FD, you would also have to depositRM5,000 into a CASA bringing the total amount deposited to RM15,000. The effective rate calculated comes up to 3.01% p.a., 1.27% lower than advertised.

These are some of the ways your fixed deposit can be structured. Always read your terms in full to know exactly where you’re storing your cash!

This was brought you by Chester John from RinggitPlus.com. RinggitPlus compares credit cards, personal loans and home loans to help Malaysians get more for their money.