3.

0 FIXED DEPOSITS

In deposit terminology, the term Fixed Deposit refers to a savings account or certificate of deposit that pays a fixed rate of interest until a given maturity date. Funds placed in a Fixed Deposit usually cannot be withdrawn prior to maturity or they can perhaps only be withdrawn with advanced notice and/or by having a penalty assessed. Fixed Deposits require a customer to place cash in a savings account held with a financial institution for a particular time frame at a given interest rate. Early withdrawals from Fixed Deposits tend to result in a significant penalty. Business.Dictionary.com explain fixed deposit as a deposit of money that pays higher interest than a savings account but imposes conditions on the amount , frequency, and/or period of withdrawals also called time deposit. 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 The most unusual characteristic of a fixed deposit is that the funds cannot be withdrawn for a specified period of time.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 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 During that time, the money remains in the account and cannot be withdrawn for any reason.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-profit organizations 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. Interest rates The interest rate of a loan is usually calculated as an annual figure, even if the terms of the loan call for a different repayment schedule. Loans for vehicles are often advertised. An interest rate expressed as an annual percentage can help determine if a particular lender's terms are 13

reasonable. Payday advance lenders, for example, can charge a flat fee for a short-term loan due upon receipt of the borrower's next paycheck. Loans can have an interest rate that is "flexible" or "fixed." A fixed rate means that the lender can only charge the same amount of interest per month throughout the life of the loan. Many borrowers prefer to find a lender who offers a fixed interest rate because the repayment terms are predictable and protected by a contract. Because the rate cannot be adjusted, however, many lenders charge more for the loans or don't offer them in the first place. When buying a large ticket item such as a home, a fixed interest rate is almost always preferable to a flexible one. In the case of a flexible interest rate, lenders often tie the loan's interest to the current federal lending rates, also known as the prime lending rate. This is the rate charged by the federal government to major banks and other lending institutions. The prime lending rate is regularly adjusted by the Federal Reserve Board chairman, based on economic factors such as inflation or high unemployment. Lenders can legally charge borrowers an interest rate that is a few points above the prime lending rate at the time of the initial loan. If the rate changes, the interest on the loan can also be adjusted. A flexible rate can be beneficial when the economy is healthy, but can be more costly if the rates are raised suddenly. Fixed Deposit Example For example, a Fixed Deposit will often be used by individuals, businesses and financial institutions around the world as a means of storing their liquid funds for a fixed period of time for future use. In the retail market, Fixed Deposits are relatively safe investments when provided by insured financial institutions such as banks, savings and loan corporations and credit unions that are duly regulated within the country in which they operate. Also, while the term Fixed Deposit is in common usage in India and some other countries, Fixed Deposits are also known as term deposits in countries like Australia, Canada and New Zealand, as time deposits in the United States and as bonds in Great Britain. Features of Fixed Deposit Depository institution (such as a bank, credit union, or a finance or insurance company) account that pays higher than savings account interest rates but imposes conditions on the amount , frequency , and/or period of withdrawals with the understanding that the customer can withdraw 14

only by giving advanced notice. A certificate of deposit (CD) is normally issued for fixed deposits. Nature and Characteristic of Fixed Deposit A Fixed Deposit, also called Term Deposit, is an investment route that provides a regular stream of income for investors, very appealing to conservative, low-risk investors. Fixed deposits involve investing a particular sum of money with a bank or a financial institution or even a company; this investment is in the form of debt. There is a particular rate of interest that is paid on these fixed deposits for a specified period of time. At the end of the specified time period, the interest payment ceases and the original amount that is invested is returned to the investor. Looking at the nature of the investment, this is a route that is suitable for all those who prefer keeping their investments safe and secure. The other reason for selecting a fixed deposit over other investment routes is to generate a regular income from the investment, which provides an element of stability to the money invested. There are several features of a fixed deposit that set it apart from various other investment options present in the market. These features determine the nature of the entire investment and how it will behave under different circumstances. Here are important features that need attention: 1. Debt investment A fixed deposit is a debt investment. This means the amount is invested with the feature considering that this will be returned to the investor once the specified time period is over. This is different from an equity investment where there is a chance of a risk with regard to the amount invested because the investor becomes the owner of the company. In case of a fixed deposit, the investor is only lending the money to the bank or the institution. 2. Lender The investor who buys a fixed deposit takes on the role of a lender in the entire transaction. In this case, the bank or financial institution taking the money is the borrower. Once the position of the lender is established, it means that the bank has to pay back the amount that has been borrowed from the investor. In that sense there is a responsibility of the bank to return the money to the investor. This also impacts the feature of the investment, which underlines that

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there is meant to be safety of the capital invested unlike an equity investment where even this might be lost. 3. Specified interest There is a return that is earned by the investor when he/she gives a fixed deposit to the bank. The return here is measured by using the term 'interest'. Interest is nothing but the amount calculated at a specified rate of return on the amount invested. There is an element of surety for the investor because the person knows the interest rate at the time of making the deposit itself and due to this reason he/she also knows the amount of money that will be earned from the investment. The important thing is that even if economic conditions are very good or very bad the investor will keep earning the same rate of interest, so this becomes like a fixed figure that is earned by the investor. 4. Time of repayment Another important feature of the fixed deposit is that the investment is for a specified period of time that is already known to the investor at the time of making the investment. At the end of the specified period, the investment will come to an end and the amount will be returned to the investor. This means that the investor knows the return for the specified time and hence he/she is able to know precisely what he/she is earning and also how the cash flow will be present in the future. Investing in a fixed deposit There are several options available when it comes to where to make a fixed deposit. One of the most common areas where a fixed deposit is offered is the banks. All types of banks, be they public sector or private sector or even co-operative banks, offer fixed deposits for their customers. This makes fixed deposits one of the most accessible options for investors because of the fact that most people have a bank account at some place or the other. The second option for investing in a fixed deposit is with a financial institution. There are several institutions that offer a deposit option. This can include housing finance institutions or even other lending institutions that offer deposits as a means of raising funds for their activities. It can also include various non-banking finance companies that are trying to raise funds through the route of deposits so that they can tap a larger investor base for their fund requirements.

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There is one more area where fixed deposits are offered; these are the companies that seek to raise funds through this route. Various companies from the manufacturing to the service sector need funds for financing their various activities and they raise money through the route of company fixed deposits. The features of all these deposits are the same; the only difference is being the entity that is issuing the deposit, so there will be a difference in the risk element for the investor in these deposits. Risk element in a fixed deposit Most people believe that because a particular investment is in a debt instrument there is no risk involved in the entire process. This is not true because every investment involves some kind of risk. In the case of fixed deposits, the risk is in the form of credit risk which arises when the institution that has borrowed the money is not being able to repay the amount because of its poor financial position. The risk element for various types of institutions is different. In case of banks, there can be a situation where a bank becomes insolvent and hence cannot repay the deposits. The amount recovered will depend upon the individual position of the bank involved. In case of other financial institutions as well as companies, there is also the same risk that the interest and the capital amount will not be repaid because of the poor financial condition of the borrower. In this situation, there is little that the investor can do because there is no guarantee present from any source and the loss, if any, will have to be completely borne by the investor. There have been several such cases of defaults by companies in the past. Sample of Malaysia Banks advertisement for Fixed Deposits 1) Maybank - Fixed Deposit Account An account that earns you interest at an agreed rate, based on the sum of money deposited Minimum investment: RM5,000 (1 month) RM1,000 (2 months and above) * Eligible for protection by PIDM

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2) UOB Bank
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Earn more with our competitive Fixed Deposit interest rate The longer the placement term, the more interest can be earned Low risk method to partially hedge against inflation

Fixed Deposit Rate in Malaysia Local Banks Affin Bank Alliance Bank AmBank CIMB Bank EON Bank Hong Leong Bank Maybank Public Bank RHB Bank Foreign Banks CitiBank HSBC Bank OCBC Bank Standard Chartered Bank UOB 12 Months Fixed Deposit Rate % (p.a.) 2.50% 3.00% 3.00% 2.60% 3.00% 3.00% 3.00% 3.00% 2.60% 12 Months Fixed Deposit Rate % (p.a.) 3.00% 3.00% 3.00% 3.00% 3.00%

Are banks the only institution that offers fixed deposit? There are many other institutions apart from banks that offer fixed deposit investment options for investors. Within the banking family there are public sector banks, private sector banks as 18

well as co-operative banks with whom a fixed deposit can be made. Apart from banks there are other financial institutions, be they housing finance institutions or even infrastructure financing ones, that offer the option of fixed deposit for investors. Similarly, there are also non-banking finance companies that offer fixed deposit for investors. Finally, moving away from the finance sector there are fixed deposits that are offered by companies and these are the companies that could be in the manufacturing sector or steel sector or automotive sector and they would make their offers based upon their need for funds. Is a fixed deposit the safest investment option? On the face of it, a fixed deposit might seem to be a very safe option considering that in equities there is often a loss of capital while this rarely happens in the deposit field. However, there is a risk involved in the process of investing in a fixed deposit. The risk is that of a credit default by the institution to which the money has been lent in the form of a deposit. If the financial situation of the borrower deteriorates then it might stop paying interest on the deposit and if the condition worsens further, even the capital amount might not be returned. This shows that there is a risk involved that does not make the deposit a fully safe option. Does a high interest rate offered on a fixed deposit represent a good investment? The interest rate that is offered on a fixed deposit by the borrowing institution helps provide an insight into the position of the entity. If the financial condition is very strong then the institution can raise funds by offering a low rate while a high rate has to be offered to the investors to get them to consider the investment given the slightly higher risk involved. That is the reason why a high interest rate offered on a fixed deposit has to be considered along with the risk that it brings along with it, and a higher interest usually means a higher risk too.

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