Fixed deposit rates have started to increase with promotional rates as high as 2.6% for one-year tenure. In fact, this has created some news about the long snaking queues at the banks.
In the current environment of rising inflation and interest rates, everything seems to be more expensive (including our mortgage payments for those of us on floating interest rate bank loans). However, one upside is that we can get better interest rates on our savings.
Despite the popularity of fixed deposits as evidenced by the long queues, there are other avenues for our savings that can offer similar, if not better, interest rates. So, why are Singaporeans still queuing up for fixed deposits?
Fixed Deposits Are Easily Accessible And Familiar
Offered by many traditional Financial Institutions (FI) such as banks, fixed deposits have been a staple for Singaporeans, including the older generation or those who are not as financially savvy. The odds are that if you are a Singaporean, you would already have at least one bank account (likely one of the 3 major banks: DBS/POSB, OCBC, UOB) and know that banks offer fixed deposits.
Fixed deposits are also a relatively simple financial instrument to understand – you put your money in a fixed deposit, lock it in for the stipulated period, and collect higher interest instead of putting it in a savings account or holding it as cash. This simplicity, coupled by its familiarity, makes fixed deposits an easy choice to invest your money (if the interest rates are attractive enough).
The 3 major banks in Singapore, and other banks and financial institutions, all offer fixed deposits which makes them accessible to Singaporeans. Just walk into any bank branch, and you can place a fixed deposit as long as you have the required funds. There are very few prerequisites needed to place a fixed deposit, no need to complete a KYC process (if you already have a bank account), or an investment risk profile.
Fixed Deposits Are Safe
For savers who cannot tolerate any volatility, fixed deposits are a safe way to get slightly better returns than just holding their cash. They offer guaranteed returns. Your principal capital is protected and returned upon the end of the tenure.
Fixed deposits are also protected under Singapore’s Deposit Insurance Scheme which insures up to $75,000 per depositor for deposits with all full-service banks and financial institutions. This adds to the perception of safety that fixed deposits have in the minds of Singaporeans, especially amongst the older generations.
However, do note that this protection only applies to $75,000 per depositor. This means that if your funds with the bank (including savings account, current account, and fixed deposit accounts) exceed $75,000, the amount exceeding $75,000 is unprotected in the unlikely event of a bank failure.
You Can Place Fixed Deposits Online
At first glance, one may think that the offered promotional rates are only for physical placement which led to the long queues. However, the fact that may baffle savvy digital banking users is that many promotional rates are also available for those who place their fixed deposits online via internet banking.
There’s no actual need to queue outside UOB to apply for the promotional 2.6% p.a. fixed deposit when you can make the same application online via internet banking in less than 10 mins (if you already have an existing fixed deposit account).
Editor’s note: online application processing times may vary from bank to bank.
The presence of bank counter staff should not be discounted as a factor that makes fixed deposits a popular investment instrument among the less digitally literate groups of people or those who face transactional or account opening issues.
Other Alternatives For Safe Investments That Earn As Much Or More Than Fixed Deposits
Aside from fixed deposits, there are other investments that also provide guaranteed principal and returns – you can check our article on 6 Investments In Singapore That Provide Guaranteed Principal And Returns
Of these, here are the ones that are as familiar and safe for the everyday Singaporean.
Singapore Savings Bonds (SSB)
The current oversubscription of Singapore Savings Bonds (SSB) is a testament to their popularity among Singapore investors.
For the October 2022 issuance, the SSB offers 2.6% p.a. for its first year and up to 2.75% for holding it for 10 years. This interest rate is on par with, if not more attractive than, some of the promotional fixed deposit rates.
Backed by the Singapore Government, investing in SSB is virtually risk-free. The interest payment is paid every 6 months and we can withdraw without penalty with a month’s notice. This makes SSB more flexible than fixed deposits as we would incur penalties for early withdrawal of fixed deposits.
We can also start investing in SSB with as little as $500. In contrast, some fixed deposits require at least $20,000 placements to earn the more attractive promotional rates. However, the downside is that there is a maximum limit of $200,000 we can invest in SSB, whereas there are no such limits for fixed deposits.
We can also invest in other government investments such as include T-Bills and Singapore Government Securities which also offer guaranteed principal and returns.
Top-ups to our CPF accounts also earn between 2.5% to 4% p.a. interest, depending on which account is being topped up.
Again, backed by the Singapore Government, we are assured of both the principal and interest when we use the cash to make CPF top-ups. However, the obvious downside is the lack of cash flow flexibility. We can only start withdrawing cash from our CPF accounts from age 55 if we meet the withdrawal conditions.
However, if our intention is to compound interest for the long term (for retirement), making CPF top-ups may be an attractive option, especially when we top up to our Special Account that earns 4% p.a. interest.
On top of the investment options mentioned in 6 Investments In Singapore That Provide Guaranteed Principal And Returns, we may also wish to consider other options if our concern is about earning higher interest while maintaining cash flow.
For maximum cashflow flexibility, we can place our savings into high-interest savings accounts. Instead of a basic bank account, we can open one that gives us the ability to earn higher interest rates. For example, if we meet all the bonus interest conditions for OCBC 360, we can theoretically earn up to 4.05% p.a. interest. However, this may not be realistic for most people. Regardless, even meeting some of the bonus interest criteria would give us better returns than just leaving the cash in a basic bank account earning a base interest rate of 0.05% p.a.
Alternatively, we can look at cash management accounts that invest in money market funds. They enable us to earn a higher interest rate by taking on slightly higher investment risk. Similar to bank accounts, they also allow us to withdraw our funds without any lock-in.
While they may offer slightly better interest rates than savings accounts, they are not protected under Singapore’s Deposit Insurance Scheme that insures bank deposits. They also carry a small level of risk as they invest in money market funds which are still affected by market volatility despite being relatively stable.
Listen to our podcast, where we have in-depth discussions on finance topics that matter to you.