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Better returns for your cash: Time deposits or money market funds?

Time deposits in Singapore are very popular, and data from the Department of Statistics show that banks in Singapore hold more than S$30 billion in time deposits. While interest rates are better than a year or two ago, time deposits still have relatively low returns. Looking for alternatives may put you in a better financial position.

Time deposits in Singapore are very popular, and data from the Department of Statistics show that banks in Singapore hold more than S$30 billion in time deposits.

While interest rates are better than a year or two ago, time deposits still have relatively low returns. Looking for alternatives may put you in a better financial position. 

ADVANTAGES OF TIME DEPOSITS

Admittedly, many people do like time deposits.

One reason is that they are safe, so depositors can be certain they won’t lose their money.

The return is secure as long as you leave your money in the bank for the full term of deposit.

Another is that they are easy to set up, since it takes just a few clicks online or a short visit to a bank to start.

Once you put your money in the account, there is nothing else to do until you get your funds back.

You will know the interest rate at the beginning and the amount you will get paid back, including your deposit and the interest you will earn.

And for impulse spenders, it is difficult enough to get the money out that it may help reduce bad spending habits. 

Even though interest rates may have dropped a little recently, they are still better than a couple of years ago.

Comparison websites such as GoBear or SingSaver recently showed that depositors could earn 1.75 per cent a year in interest from HSBC or Hong Leong Finance, or an even-higher promotional rate of 1.85 per cent at CIMB.

Looking at banks’ websites directly could give even better results, such as Maybank’s recent 2.10 per cent promotional rate.

For a cautious investor who cannot afford to see their investment go down or cannot stand the thought of a drop, then this low-risk investment sounds good.

While such cautious investing won’t perform as well as other investments, it also won’t crash if stock markets drop.

CHALLENGES OF TIME DEPOSITS

On the other hand, time deposits may not be as good as they seem for meeting your longer-term goals.

One reason is that inflation reduces the value of your investment.

Even though inflation dropped from 1.2 per cent in June to 0.8 per cent in July, the real return on a deposit at 1.75 per cent would be less than 1 per cent a year.

There is also no certainty about what interest rates will be in the future, so you may earn less after your time deposit matures. It may be even worse if you forget the maturity date and it rolls over automatically, since you may no longer get higher promotional rates.

More importantly, receiving a return of about 1 per cent a year makes it unlikely that you will earn enough to reach longer-term financial goals such as paying for your children’s education or enjoying a comfortable retirement.

The result, as La Trobe Financial’s chief investment officer Chris Andrews told Money Magazine Australia, is that time deposits “offer great security but very low returns. In many cases, investors are finding that the returns are inadequate to meet their needs and objectives”.

ALTERNATIVES TO TIME DEPOSITS

If you want better returns so you can achieve your financial goals, you will need to take more risk.

The dilemma for many investors is to figure out how much risk they can take and still be comfortable.

To learn more about your risk profile, you may use tools such as the Standard Life UK’s “Assess your attitude to investment risk” online questionnaire, which provides a score that will help you understand your risk profile. 

If you do want to earn more while still taking less risk than you would have in the stock market, there are alternatives.

1. Bonus interest

One relatively safe option is to look for bonus interest on savings accounts.

The UOB One account, for instance, offers up to 3.88 per cent a year when you spend S$500 monthly on your credit card and credit your monthly salary of at least S$2,000.

DBS offers interest rates as high as 3.8 per cent a year if you have your salary credited to your savings account and have transaction in three categories. You will need to be very disciplined, because interest drops back to about 0.1 per cent if you don’t follow all the conditions.

2. Robo-advisers

Another option is to use a robo-adviser such as Stashaway or Auto-Wealth.

These services ask questions to understand your risk tolerance, then suggest exchange-traded funds (ETFs) or other investments that match your profile.

While there is a risk that the value of the investment could decline, investments in bonds or lower-risk ETFs have historically returned more than time deposits and are less volatile than stocks.

3. Exchange-traded funds

One more lower-risk option is to put your money directly into ETFs that invest in bonds. You can invest into ETFs such as the Nikko AM Singapore STI ETF, which tracks the Straits Times Index and returned about 5 per cent in the year ending 30 June, or the ABF Singapore Bond Index Fund that tracks the iBoxx ABF Singapore Bond Index.

While time deposits are safe and easy, they may not help you enough in reaching your real goals for your financial life over the longer term. Taking a bit more risk can set you up better for the future.

Related topics

time deposits investment money finance banks

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