Deep, deep dive
- Before you invest, check that your FD is insured by PIDM
- Check terms and conditions before agreeing to promotional rates
- Split your FD savings into a few smaller accounts
- Make sure you know the penalty of withdrawing funds before the end of the term (prematurely)
- Understand requirements to partially withdraw funds from your FD
Check terms and conditions before agreeing to promotional rates
Be aware that promotional rates come with terms and conditions attached. Most commonly, you may be required to maintain a balance in another savings or current account, take up a loan with the bank, or maintain a credit card with them. This allows the bank to offset the higher promotional rate with a lower interest rate on the savings or current account, or with interest payments you make on your loan or credit card. This brings down the effective interest rate that the bank is paying you for your total deposits.
For example, let’s say that you take advantage of a promotional interest rate of 4% per annum on a 1-year fixed deposit of RM10,000. However, the bank has a condition that requires you to maintain a balance of RM5,000 in a separate savings account paying interest at only 2.00% per annum.
What this means is that you are effectively placing RM15,000 in the bank, and effective interest rate is 3.33% per annum on all you deposits (RM10,000+RM5,000). If you were going to put RM5,000 in that savings account anyway, then the requirement doesn’t make a difference to you and you’re truly enjoying a promotional rate. Otherwise, you should see yourself as placing an RM15,000 fixed deposit at a 3.33% annual interest rate.