We all know that fixed deposits are practically the easiest, safest, lowest-risk form of investment available – but did you know that there’s more than one type of fixed deposit in the market? We’re not just talking Bank A versus Bank B, either.
The Standard Fixed Deposit
The standard fixed deposit is easy to understand in principle. You deposit a certain sum of money, known as your principal, into a fixed deposit account at the bank, choose a deposit term, and wait for your fixed deposit to mature in order to get your principal back plus a set interest.
The Step-Up Fixed Deposit
Have you ever stumbled across a fixed deposit advertisement and done a double-take because the interest rate offered is much higher than the board rate? Whoa, whoa, hold your horses for a minute and look at the deal in detail. Is the advertised interest rate given to you every month, or does it seem to creep up in tandem with your deposit tenure? If your answer is the latter, then you’ve just discovered an example of a step-up fixed deposit. With this type of fixed deposit, you might earn, for example, 3.15% for the first three months, 3.20% for the next three months, 3.25% for the next three months, then – finally! – the advertised 3.40% interest rate for your fixed deposit. As a result, the effective interest rate of your investment will be lower than the advertised rate, since you’ll only get that advertised rate towards the end of your tenure.
The CASA Bundling Fixed Deposit
No, the ‘CASA’ here does not refer to a ‘home’ as it does in Spanish. In banking jargon it refers to a Current Account, Savings Account. CASA bundling means that you’ll have to deposit a certain amount of money into a CASA account with the same bank if you wish to qualify for the fixed deposit you’re gunning for. CASA bundling usually occurs as part of a promotion, so it’s a take it or leave it situation for you. The amount to be deposited into your CASA account is usually either a pre-determined amount (a.k.a. minimum deposit sum) or a percentage of your fixed deposit amount. For example, you might have to deposit RM2,000 into a CASA account if you wish to deposit RM10,000 into a fixed deposit account. Do you think that’s a good two-in-one deal? Think again.
CASA accounts pay you measly interest rates even in comparison to fixed deposits. Necessitating a CASA deposit also forces you to either cough up a larger sum of money for your investment or split your investment sum in two, a portion of which will be loss-making when you take inflation into consideration. Both these points will drag your effective interest rate down.
The Double-Duty Fixed Deposit
Then there are fixed deposits that pose as stellar performers on advertisements, but are in reality linked to more aggresive, riskier forms of investments, such as unit trusts. After all, higher risk equals higher returns on investment (ROI) in the investment world, so the introduction of a riskier investment to a safer one will average out and sort-of-artificially boost the interest rate of the latter. Unit trusts are known and proven to out-perform fixed deposits, after all (unless you’re unlucky or a poor investor), so such linked fixed deposits look appealing – but remember that unit trust ROIs aren’t guaranteed!
With all these fixed deposit variants floating around, it’s best to do one thing many people don’t when you sign up for something: read the terms and conditions first!