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3 Myths about Structured Deposits


DollarsAndSense.sg has recently introduced some Alternative tools to manage your wealth. We discuss about structured deposits today.

Singapore, being the financial hub of South and South East Asia, definitely has her mechanisms in place to protect her residents. However, that being said, we should not see a Structured Deposit (SD) as a common deposit account that you opened as a child with POSB.

Here are three myths that we’ve heard people say about SDs.

 

(1) A SD is a deposit; therefore my money is guaranteed to be safe!

It is true that the Singapore Depository Insurance Corporation (SDIC) guarantees the first SGD 50,000 deposited in each depository institution (a.k.a. bank). However, there are only three kinds of deposit accounts that are guaranteed by SDIC.

These deposit accounts are

  1. Savings account
  2. Fixed deposit account
  3. Current account

A SD is not one of those deposit accounts. Hence, you should not assume that the SDIC would guarantee your principal investment or interest payouts if anything goes sour.

 

(2) The bank guarantees my principal; therefore my money is safe!

Most banks that issue SDs generally say that they guarantee the amount (ie. your principal) that you put in to be safe. However, that level of guarantee really depends on which bank you are referring to.

If you obtained a SD from DBS Bank, and the bank says that they guarantee that principal amount, we would believe that the bank will live up to their promise.

These are the reasons to believe in DBS bank

  1. It is the largest ASEAN bank
  2. It has credit ratings of Aa1 (Moody’s) and AA- (Standard & Poor’s)
  3. It is a systemically important bank in the region; hence we believe that the Government of Singapore will certainly provide support

This would not be the case for a bank like Piraeus Bank. This is a Greece bank that has a credit rating of Caa1 (Moody’s) and CCC+ (Standard & Poor’s). Even if the Government of Greece was to back the bank, it does not say much as the Government of Greece is struggling to meet its own obligations due to the gloomy European economy.

 

(3) My interest payments are a guaranteed value! 

From point (2), whether the amount is guaranteed really depends which bank you are referring to. This also applies to the interest payout that the bank has stated.

However, banks do not always guarantee interest payouts as interests are pegged to an underlying asset, such as stocks or bonds. We found out that OCBC Bank does not fully guarantee interest payouts despite being the second largest bank in South East Asia and having one of the best credit qualities in the world.

 

Conclusion

Structured deposit is not a typical deposit that you would obtain. It is actually an investment vehicle. This shows that we should always investigate the terms and conditions of the product before sinking our hard-earn money into a product.

In follow up articles for structured deposits, we will be writing on;

  • 5 must-dos before investing in a Structured Deposit
  • 3 Structured Deposit comparisons from different banks

 

This is the 2nd of a series of articles that DollarsAndSense will be touching on with regards to tools that are available to Singaporeans in managing their financial health. Feel free to drop us a comment at the end of this article or Facebook message us.

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