Fixed Income Products - Bank Deposit

What is your risk appetite towards investment? Are you so afraid to invest or are you willing to take some risk to improve your return on investment? Whether you are risk averse or a risk taker, there are products available in the market to suit your individual risk profile.

Today, I shall cover the safest investment options that you can go into to start growing your money and that is none other than bank deposits. Bank deposits are excellent investment options for emergency funds, capital preservation, and short term financial goals. These are practically risk free investments, that is you won't lose any money. However there is a trade off for that lack of risk and that is you don't get much return.

What is meant by "practically" risk free? It is risk free in the sense that you do not lose it in monetary term, but in term of its purchasing power, you will find that it declines over time. Why is that so? It is because of inflation. Inflation is associated with rising prices of goods and services. It is a condition in which too much money is chasing after too few goods. Hence if the interest you earn from the deposit barely covers the prevailing inflation rate, you would actually be losing buying power. So bear in mind that there is still a risk if you just leave your money idle in the bank.

Examples of bank deposits are saving deposit and time deposit.

Saving deposit is more liquid but has relatively lower interest rate than time deposit. It is liquid because you can draw it anytime you like. It is an excellent place to put your emergency fund.

Time deposit or certificate of deposit is not liquid compared to saving deposit because you are expected to let the bank locks up your saving for a period of time. Typically, you invest a fixed amount of money for a predetermined amount of time called the term, and you are guaranteed your principal plus a fixed amount of interest, which you receive either upfront, periodically, or at the end of the term. When the term expires, you can cash out the principal and interest, or roll over the deposit for another term. You can opt to withdraw the interest as they are received.

Time deposit or certificate of deposit can be purchased for terms ranging from three months to five years or more. Although interest rate is higher the longer you allow the bank to use your money, it is not a good idea to buy with term of more than five years. The interest rate situation could change dramatically during that time and you could get stuck with a long term, low interest rate deposit. As there is a defined date of maturity, cashing it in before that time will incur penalties.

In case you are not aware, saving and time/certificate of deposit are covered under the deposit insurance scheme in some countries.

For the risk averse, this is a good place to grow your money. For the risk taker, it has a place in your investment portfolio too as it helps to spread your risk. Very important though, you must make sure that the deposit interest rate is higher than the inflation rate. Also, bank competes for deposits by offering better than average rates. It is advisable that you shop around to find banks that offer the highest yield possible on your deposit.

Remember, there is still risk if you just keep your money idle in the bank. Give your money the opportunity to grow for you.

Ways to Invest

Have you started saving for your emergency fund? I encourage you to do so if you have not. For those who have already reached the targeted emergency fund, I congratulate you. This means you are ready to invest.

There are a number of ways that you can invest in the financial markets. As an investor, you would want to make the right investment choice that best suits your financial needs. Hence, you must take charge of your own investment.

As a start, you should get yourself familiar with the different types of investment instrument available in the financial market. The common ones are:

a) Bank Deposit
Bank deposits like fixed deposit accounts are usually short term investments to hold money for use in the near future. It is easily convertible to cash. Such deposit has low risk of losing value but offer low potential returns.

b) Insurance Products with savings or investment element
These are product that provide not only protection but also a saving or investment plans. Examples of these are whole life polices, endowment polices, annuities, and investment linked insurance policies.

c) Bonds
When investing in bonds or fixed income/debt securities, you are actually lending money to finance a corporation or the government's operation, becoming a creditor of the corporation or government. Bond investments are interest earning and the bonds value appreciate or depreciate in relation to interest rate changes. This is generally a safe investment. However, except for bonds from the government, bonds carry the potential risk of default, no matter how remote that risk might be.

d) Structured Deposits
A structured deposit is essentially a combination of a deposit and an investment product where the return is dependent on the performance of some underlying financial instrument. Typical financial instruments linked to such deposits include market indices, equities, interest rates, fixed income instruments, foreign exchange or a combination of these.

e) Mutual Funds / Managed Funds /Unit Trust
A mutual fund is an investment company that takes cash from investors and invest it into diversified securities, providing investors with both diversification and professional management of their funds. A mutual funds invest in stocks, property, bonds, options, money market securities, and commodities to name a few, depending on the fund's investment objectives.

f) Shares and Equity
Stock investment is equivalent to holding an ownership in a corporation, and your investment value appreciates as the price of the shares or equity goes up and vice versa. This is considered a high risk investment, unless you managed it well with great discipline.

g) Option Trading
An option is a contract between two parties giving the taker (buyer) the right, but not the obligation, to buy or sell a security at a predetermined price on or before a predetermined date. To acquire this right, the taker pays a premium to the writer (seller) of the contract. There are two types of options available: call options and put options. Call options give the taker the right, but not the obligation, to buy a security at a predetermined price on or before a predetermined date. Put options give the taker the right, but on the obligation, to sell a security at a predetermined price on or before a predetermined date. The taker of the put is only required to deliver the underlying shares if they exercise the option.

Above are just a brief account of what they are. You will get more details in due course. So stay tuned.