9th October 2020 - 10 min read
It’s been a while since I’ve posted, but it’s been a busy time here at RinggitPlus. We’ve got a few really exciting things going on, one of them being our annual RinggitPlus Malaysian Financial Literacy Survey 2020 (if you haven’t done the survey, please do so. It will help us get a sense of how things are going financially with Malaysians, this is especially important this year!)
In recent weeks, I’ve been asked this important question in various forms, which is “Hey Hann, now that BNM’s OPR is so low (1.75% at the time of writing), how should I best save my money? Are fixed deposit (FD) accounts still good?”
With BNM’s Overnight Policy Rate (OPR) having been reduced from 3.00% at the start of the year to a record low of 1.75% today, it’s not great news for those who are reliant on FD interest as a source of income. This group commonly consists of retirees, as they cannot take on risks to grow their savings. Of course, there are other segments in this group as well, but as a whole they are most impacted in terms of generating returns.
In general, FD rates are dependent on the current OPR, because the OPR is the interest rate that BNM issues for banks to lend funds to one another (yes, banks also borrow money from other banks). This rate is usually passed on to the customer (that’s us), which is why the OPR essentially determines the interest rates of all savings and loans offered by the banks.
A lower OPR means lower interest rates – which applies to both loans and savings. BNM may lower the OPR to encourage lending (and thus, spending) to stimulate the economy. The 1.75% rate today is the lowest it’s been for years, because BNM is doing its role to jumpstart the economy which has been battered by Covid-19 and the various MCOs.
If you do quick sweep of both board and promo FD rates among local banks today, you’ll find that the rates have indeed come down in lockstep with OPR, with rates between 1.5% – 2.5% p.a. depending on the tenor and promotion, when in September 2019 they were almost double at 3.0 – 4.2% p.a..
So, while FDs have always been considered one of the best ways to earn guaranteed returns on an individual’s savings, its returns today (and the foreseeable future) may no longer be adequate to fund retirement expenses or supplement retirement incomes.
But before you start withdrawing your lifelong savings in FD and following some “financial gurus” and their dangerous advice to invest in stocks or properties or gold or some random investment plan, take a step back to consider the possible outcomes.
For example, a retiree who expects to live only a few years (sorry, morbid example) will not find that investment advice particularly useful since it exposes them to capital risk without sufficient time to recoup any potential investment losses and enjoy higher returns in exchange for taking that risk.
Oh, and with the huge amount of financial scams and fraud cases lately, it’s best to play it safe and stay vigilant – if anything sounds too good to be true, it probably is.
Whether you are in retirement or just an individual with low risk tolerance and suffering from cripplingly low interest rates on your FDs, what can you do?
Before you start considering riskier options, here are some quick and easy ideas to maximise returns. If you’re open to a little risk, there’s an option for you at the end of the list as well.
Wait Hann, didn’t you just say FD rates are at a record low and we should do something about it? Surely not put back into an FD or a CASA (Current Account/Savings Account)?
Well, unless you’re an “FD hunter” already, your FDs are probably stuck in low(er) interest board rates of 1.X-2%, and the time is now more than ever to turn into a FD hunter (someone who does homework and ensures they’re at leading rates all the time).
My research team keeps tabs on rates each month, and they’re updated and freely available in our Best Fixed Deposit Accounts In Malaysia piece, so you can ensure you’re at the top end of that 2.5% rather than in the 1.X% range. Why bother? Well for some who have the RM250,000 PIDM-guaranteed limit stashed away, 1% is an extra RM2,500 a year; not bad for a couple of hours of work moving things around, right?
Additionally, you might also want to consider high-interest savings accounts. We also have an actively-updated article on that, because these accounts easily offer 10-20x more interest than a conventional savings account. Of course, there are some requirements or “tasks” that you need to do to unlock the high rates, such as depositing a minimum amount into the account, or spending a set amount with your credit card by the same bank. Some banks even unlock more “bonus interest” if you purchase insurance or savings plans.
High-interest savings accounts are a useful option if you:
Best of all, you can do both from the comfort of your own home through the articles above – we’ve done the research for you.
OK, so you’re an FD loyalist, and are feeling a little lazy to constantly move your money around different banks every 3-6 months or so, but still want to maximise your interest?
Why not try the FD Log Roll, inspired by the folks who built the Pyramids:
The concept is as follows: Rather than tying up all your money into a 12-month FD or suffer low interest on a 1-month FD (reminder, this is for lazy FD loyalists only), why not split this savings into 12 equal amounts, and have concurrent 12-month FDs which mature (and automatically renew) each successive month?
After the first year, you’ll have all your money in long term FDs (earning 2.-2.5% p.a. rates based on today) but yet have monthly flexibility when you need some money out!
As an illustration, say you have RM120,000. Under the FD Log Roll concept, you would split into RM10,000 x 12 and have maturity dates as follows:
Remember, you don’t have to go to the bank once a month for the next 12 months to do this – almost all online banking facilities offer easy FD placement. Once you’ve set this up, you’ll always have some funds readily available to withdraw each month without any interest penalties.
This is a simple one that some folks overlook. A flexi home loan is attached to a current account, where interest earned there is used to offset the interest charges from your home loan.
What’s more important, a current account may have a higher interest rate than a short-term FD (i.e. 1-12 months). So instead of putting your savings into an FD, you could put it into the offsetting current account to “upsize” your effective interest (and thus reduce the interest charges incurred on your home loan). What’s more, a current account also lets you withdraw funds at any time, with no lock-in period like a traditional FD.
As an example, let’s say you’ve got a RM500,000 Flexi Home Loan balance with Bank A at 3.3% p.a. The same bank’s FD rate is at 2.0% for 12-month FDs. If you kept savings of RM100,000 into Bank A’s FD, you’re basically saying no to up to 1.3% p.a. in interest on that RM100,000, because if you stuck it in the linked current account to that Flexi Home Loan, you would be paying 3.3% interest on only RM400,000 (RM500,000 – RM100,000), saving you 3.3% x 100,000 (RM3,300) per year vs making only 2.0% x 100,000 in that 12-month FD (RM2,000) for that same year. A big difference, plus you get to use any of that RM100,000 at any time!
Investopedia definition: A money market fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents. These funds are generally seen as extremely low-risk, but some individuals have the assumption that since they are not guaranteed by Perbadanan Insurans Deposit Malaysia (PIDM) like FDs, our money is “not safe”.
In practice, a MYR money market fund in Malaysia will invest typically in Malaysian Government Securities (MGS). Some funds will also invest in fixed income securities issued by corporations or financial institutions that may be guaranteed by the Malaysian government, Bank Negara Malaysia, or government-related entities. So your capital is only really at risk if the Malaysian government or the corporation defaults (of course, you should read up on the fund’s factsheet to see where it is investing before deciding).
So yes, while PIDM offers deposit insurance guarantees on your FD accounts, most money market funds invest in securities issued by BNM on behalf of the Malaysian government. Will let you readers decide if one is riskier than the other!
Fun fact: one of a bank’s main investments is on government-issued bonds (as well as securities issued by private corporations). These investments are generated from fixed deposits (ever wonder why most FD promos require “fresh funds”?), and the difference between the returns from those securities and the FD interest paid back to customers is the bank’s profit.
WARNING: this option has capital market risk, i.e. you may lose money. So this should not be an option for the risk averse.
In general, you can expect bond fund returns to be in the range of 4-6% based on current Malaysian Government Bond yields.
Again, you’ll need to check what each bond fund’s allocation covers – they may also include a mix of short- and medium-term bonds issued by both the government and private corporations. Different fund managers will allocate different ratios to fit in to the fund’s risk exposure and, of course, maximise returns.
But remember! This option carries the risk of capital loss. So go in with two eyes open on this one, and don’t put your hard-earned savings into something you’re not familiar with. Regardless if you’re a retiree or just a risk-averse individual, you should review your overall portfolio (including EPF, property) with a licensed financial planner (or contact me if you need, I’m one) to see if having an allocation to Bonds / Bond Funds is a suitable strategy given your financial goals.
While OPRs are at their lowest rates in years and unlikely to increase for at least 6 months or more (due to the ongoing economic damage from the Covid-19 pandemic which is likely to stretch well into 2021), it’s really important to not be too downhearted if you’re dependent on FDs and cash savings to fund your expenses.
Regardless of where you are in your life stage, know that you can still do something about it and earn some meaningful returns.
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