Fixed Deposits

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What are they?

Fixed deposits (FDs) are safe instrument to earn interest on cash you'll not need for awhile. You
place with a specific sum of money for an agreed term and interest rate offered by the bank.
Larger deposits or longer terms of duration are rewarded with higher interest rates. In general,
the rates offered are higher than those of regular deposit accounts. At the end of the agreed
term, you can take your deposit amount and earned interest or you can renew the investment.
Foreign currency FDs allow you to earn interest rates that are generally higher than those
available in Singapore. Foreign currency FDs behave exactly as regular FDs with one exception:
you need to convert your money into the target currency when you invest and back into any
currency you want when you redeem. The fact that exchange rates move over time add an
element of uncertainty to these investments.
Another available option is to use your CPF to invest in approved fixed deposits. Under the CPF
Investment Scheme, CPF balances in excess of the minimum required sum can be invested into
FDs with approved financial institutions. The normal minimum investment in a CPF-approved FD
is S$5,000.

How do they work?

Deposit: After finding an FD that meets your needs, you'll need to deposit sufficient funds with
the offering institution. If you are investing in a foreign currency FD, you may need to pay for a
foreign exchange transaction (to convert into the FD currency). If you are investing CPF monies
into an approved FD, you'll need to provide your CPF account information to the offering
institution. Your CPF agent bank will check that you are in compliance with any guidelines and
restrictions before transferring your funds.
Withdrawal: You can withdraw your funds upon maturity of your FD. You will be given your
investment amount plus all accrued interest. Should you need to withdraw your funds prior to
maturity, you are likely to incur a penalty. These usually imply the forfeiture of a portion of the
interest you've earned. When you withdraw your funds from a foreign currency FD, you'll likely
incur a fee for conversion back into Singapore dollars.
Renewal: Most FD investments renew automatically, so you must pay attention to the maturity
date. Your bank may not notify you when the maturity date is near. Thus, the burden falls on
you to notify the bank of your wish to withdraw the funds or reinvest in a different FD.
Foreign Exchange: When investing in foreign currency FDs, you'll need to fund the deposit
with the target currency. Therefore, you'll normally conduct a foreign exchange transaction to
convert Singapore dollars into the target currency. This transaction usually implies a fee. Upon
withdrawal, you'll need to reverse the transaction (possibly incurring another fee). Over the
term of the FD, exchange rates may move in your favour or against you. This implies greater
uncertainty regarding the actual return you may receive, including the possibility of a larger
gain or a partial loss.

How do I find the best deal?

When searching for the right FD, keep these tips in mind:
Withdrawal Restrictions: Check to see if the bank imposes any penalty for early withdrawal
of your funds.
Term of the Deposit: Select a length of time that ensures you'll not need to access the
funds before the maturity date.
Foreign Exchange: Ask to see what fees will be applied to convert your holdings into
the target currency and back into Singapore dollars upon
maturity.
Interest Rate: Compare interest rates from various providers with the knowledge
of their early withdrawal restrictions and other applicable fees.

Tax Implications
Interest received from deposits with approved banks or licensed finance companies in Singapore
on or after 1 Jan 2005 is not taxable. You do not need to declare interest that is not taxable.

W ith interest rates rising over the last one year, fixed deposits have become popular again.

But there are certain things that you should know about fixed deposits before they go around investing in
them. Here are five must-knows about fixed deposits:

1. Interest paid either monthly or quarterly

The interest on a fixed deposit is usually paid out either monthly or quarterly depending on the option that
the investor chooses. So an individual investing Rs 1.5 lakh (Rs 150,000) in a one-year fixed deposit paying
an interest of 8% per annum will get Rs 1,000 per month (8% of Rs 1.5 lakh divided by 12; or Rs 3,000 per
quarter (8% of Rs 1.5 lakh divided by 4).

Other than this, those depositing money in a fixed deposit also have the reinvestment of interest option
available.

2. The yield or return on a fixed deposit is different from interest.

An interest of 8% in a year would mean a return of 8.24% in a year for those individuals who opt for the
reinvestment of interest option.

What this means is that Rs 100 invested at the beginning of the year will amount to Rs 108.24 by the end of
the year. This is because the interest earned is compounded every quarter.

An interest of 8% in a year would imply an interest of 2% in a quarter. Hence Rs 100 invested by an

individual would earn an interest of Rs 2 (2% of Rs 100) at the end of three months. So the Rs 100
investment made by an individual would have amounted to Rs 102 by the end of three months (Rs 100 + 2%
of Rs 100). Since this interest is reinvested, the individual earns 2% interest on Rs 102 for the next three
months. The interest earned for the next three months is Rs 2.04. This interest is also reinvested and the
individual earns an interest of 2% on Rs 104.04 for the next three months.
Repeating this process at the end of the year, the individual has accumulated Rs 108.24 and hence a return
of 8.24%, which is higher than the interest of 8%.Given this individuals putting money in a fixed deposit who
do not need a regular income from the fixed deposit, it makes more sense for them to opt for the
reinvestment of interest option and earn a greater return.

3. Want to break a fixed deposit? Careful

At times it might become necessary to break the fixed deposit either because the money is immediately
required or for the fact that other banks have started offering a higher rate of interest on the deposit.

Breaking a fixed deposit has a cost attached to it. Most banks, on premature withdrawal, give an interest
which is 0.5% lower than the interest applicable for the period for which the deposit has remained with the
bank.

Let's try and understand this through an example. An individual makes a three-year deposit, paying an
interest of 9% per annum. Due to urgent need of money he may have to break the deposit at the end of one
year. The bank for a period of one year pays an interest of 8.5%. The individual will be paid an interest of
0.5% less than 8.5% which is 8%.

4. The interest earned on a fixed deposit is not tax free

The interest earned from a fixed deposit gets added on to the income for the given year and is taxed
according to the tax bracket that an individual falls into. Hence, for those falling in the top tax bracket the
interest earned from a fixed deposit is taxed at the rate of 33.99%.

5. It is possible to take loans against fixed deposits

This works out to be cheaper and involves less paper work vis a vis taking a personal loan.

It's that time of the year when most of us would be receiving salary hikes and bonuses. While few of us
would have already planned for things to buy or invest into, a majority would still be unclear about what to do
with their money. For the latter, the money would lay idle in their banks' savings account by default.

Though it will earn an interest of 3.5 per cent per annum, we think you deserve to earn more. Don't you?

So instead of keeping it in the savings account, there are many schemes / facilities offered by banks that
can come handy during these times. For example normal bank fixed deposits schemes, flexible rate deposit
schemes, and sweep-in / sweep-out facility.

Each of these options provide for higher interest rates compared to bank savings account and with the same
degree of safety. Let's look at these options and choose the right mix so that your money starts earning
more money for you.
Everyone knows about bank fixed deposit (FD) schemes. The tenure of deposit ranges from 7 days to 10
years. However, the suggestion here is not to go for FD of less than 3 months. This is because the rate of
interest on such deposits is less than what is offered by savings account (3.5 per cent).

Please note that as per the Reserve Bank of India's, RBIs, new guideline, the rate of interest on savings
account will be calculated on a daily basis (Read:Why your savings account will earn more interest now)
effective April 1, 2010.

So, if you want high liquidity for 3 to 4 months, then do not use the FD route. Your savings account will fetch
you 3.5 per cent interest anyways.

The best way to invest in a FD is to book multiple FDs with varying maturities. If you need certain amount of
money after 1 year, go for 1 year FD for that much amount. Depending on the future money requirements,
other FDs with higher maturity of say 3 years, 5 years or 7 years can been booked accordingly.

By applying this simple strategy, you are meeting your liquidity requirements as well as earning higher return
on a cumulative basis. And not to forget, you are not breaking any FDs to meet your requirements.

Words of caution: At the time of booking any FD, make sure you are selecting the correct interest payout
option. If you want regular returns, go for quarterly or half-yearly payout options. Else, choose interest re-
investment option (your interest payout will be re-invested to earn more money for you).

Another advantage of investing in fixed deposits with tenure of 5 years or more is that you can avail tax
rebate on your annual salary for the current financial year. As per Section 80C of the Income Tax Act, you
are eligible to get tax rebate on an investment of up to Rs 1 lakh in bank FDs of 5 year or more.

The Flexible Rate Deposit Scheme collects money from investors and invests in government bonds of
various maturities. Since government bonds are traded in the market, the rate of interest is determined by
the economies of demand and supply.

Here too, you can select various products with different maturities and earn variable rates of interest. This
way you can build a portfolio of flexible FDs that will match your returns with what is prevailing in the market.

The objective of the scheme is to provide protection against interest rate volatility by offering deposits at
flexible interest rates. Flexible rate schemes are a win-win product for both the depositor and the bank since
the rates are directly linked to the market.

Another advantage of this scheme is that it acts as a hedge against inflation. Ideally, if inflation rises, your
real return (actual return minus inflation) from normal FD declines. However, in case of flexible rate deposit
scheme, the real return would remain unchanged. This is because RBI will raise interest rate to tackle
inflation, which in turn will raise market interest rate, and hence your return from flexible FD will increase
proportionate to inflation.
Many banks are nowadays offering such facilities. The Sweep-in / Sweep-out facility provides the benefits
of both worlds -- the liquidity of savings account and the higher returns of FD.

This is how it works: Whenever your savings account balance crosses the average quarterly balance
requirement, the excess amount gets automatically swept into a flexible fixed deposit. Thus earning you a
higher return vis-a-vis bank savings account.

The best part is that your FD is not fixed. In case you want to withdraw more than the available average
balance, the fixed deposit will be broken to the extent of the amount you require to meet your needs. Thus
giving you the liquidity of a savings account.

This is basically good for those who are not sure about their liquidity needs in the short-medium term.

Summary

By choosing a judicious mix of bank products discussed above, you can make your money work for itself.
After all you have earned your annual bonus through sheer hard work and pain! But bank FDs are just one
of the options for you.

You should look to exploit other options like stocks, mutual funds, real estate, etc. Here we have just
provided guidance on how to leverage banks' existing products to generate higher returns vis-a-vis bank
savings account. The idea finally is to make you a smart wealth manager of your own money.

Fixed deposits are loan arrangements where a specific amount of funds is placed on deposit
under the name of the account holder. The money placed on deposit earns a fixed rate of
interest, according to the terms and conditions that govern the account. The actual amount of the
fixed rate can be influenced by such factors at the type of currency involved in the deposit, the
duration set in place for the deposit, and the location where the deposit is made.

The most unusual characteristic of a fixed deposit is that the funds cannot be withdrawn for a
specified period of time. In most cases, fixed deposits carry a duration of five years. During that
time, the money remains in the account and cannot be withdrawn for any reason. Individuals,
corporate entities, and even non-profitorganizations that wish to set aside funds and limit their
access to the funds for a period of time often find that fixed deposits are a simple way to
accomplish this goal. As an added benefit, the monies in the account will earn a fixed rate of
interest regardless of any fluctuations in interest rates that apply to other types of accounts.

However, both these benefits can also turn into disadvantages under certain circumstances.
Because the money cannot be withdrawn until the duration is complete, the funds cannot be used
even in emergency situations. Changes in the going interest ratemay also rise to a point above
and beyond the interest rate applied to existing deposits. This means account holders are actually
earning less interest with fixed deposits than with other types of loans and accounts.
While the interest rate on fixed deposits cannot be changed, there is sometimes a way to work
around the issue of obtaining use of funds in an emergency situation. At times, the lending
institution where the fixed deposit is placed may be willing to extend a separate loan to the
account holder, using the fixed account as collateral. While not ideal, this can at least make it
possible to deal with the current financial crunch.

Fixed deposits are a credible way to make a return on investment that is somewhat higher than a
standard savings account. The use of fixed deposits can also be helpful when working with
various types of currency. By establishing what is known as a Foreign Currency Fixed Deposit or
FCFD, it is possible to choose the type of currency involved in the deposit and lock in a rate of
interest. If the choice of currency is a good one, this means the investor can enjoy a healthy fixed
deposit currency rate for the duration of the deposit and earn more than with a standard fixed
deposit strategy. However, going with an FCFD does contain a slightly higher amount of risk,
since the funds deposited must be converted to the currency of choice and then converted back
when the deposit is fulfilled. If the currency did not fare well in the interim, there is some chance
of obtaining a loss, due to the changes in the rate of exchange from the time the fixed deposit
was activated until the time the deposit is considered complete.

Fixed Deposits The principal features of this kind of investment are: these are
timebound, i.e., interest is received only for a stipulated period; the value of the invested
amount does not appreciate; the interest rates are fixed for the period of deposit; the deposits
with companies are unsecured. Companies usually accept deposits for 1, 2 or 3 (expect for
leasing and hire purchase companies where the minimum period is 2) years, paying interest
monthly, quarterly, or half yearly; the maximum interest they are allowed to offer is 15%
although some companies try to improve this rate by calculating interest every month. Fixed
deposits can be cumulative. Fixed deposits are also accepted by banks (lower interest rates)
and financial companies. The risk in this kind of investment, apart from the erosion of the
value of capital as a result of inflation, is (a) default or delay in interest payments, (b) delay or
default in the refund of deposits, and (c) the company going into liquidation. An individual
investor is practically helpless should any of these happen. Some of the government
sponsored corporations are notorious defaulters.