Everything you EVER need to know about Fixed Deposits in Malaysia

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Fixed deposits is among one of the very common methods you can use to grow your money. This is one which you can consider if you are able to set aside a certain amount of money for a particular period of time, then this investment would surely be worth your time.

Grow your money

What you want to get out of your fixed deposits is something you cannot get from other forms of investments. Basically, fixed deposits or FD gives you:

  1. Guaranteed Returns
  2. Security for your savings
  3. Convenience

Efficient and quick application

Most, if not all commercial banks in Malaysia offer FDs. Applications can be made and completed within an hour. All you need is to have your funds ready, the duration you are interested in and you are ready to go! But before you set out and put your money into these accounts, what is there that you should know? Check out below:

Everything you ever need to know about FDs

First things first, FD or Fixed Deposit is as straightforward as it sounds. It is when you deposit your money for a fixed duration of time. Only when the term matures can you withdraw the money. This is where you are not encouraged to withdraw any amount before the term ends as you will have to pay a penalty for that. Take note that in some markets, FDs are called ‘term deposits’.

Get to the bottom of all the FD types

To begin with, your regular savings account will never be able to give the type of returns you can expect from FDs. In regular savings accounts, your interest is usually paid at the end of the month after it is being calculated. In FDs, you get your interest after the term matures. Since the interest rate is already fixed, you will be able to calculate the amount at the end of the term. Names that are used for FDs include:

  1. Short-term FDs – Perfect package for those of you who are looking for a quick savings scheme. This is where you can enjoy the interest without having to wait for many years. In most cases, the FD has a short period in terms of duration. In other words, it could be as short as 3 months and it really depends on your requirements.
  2. Long-term FDs – Any term deposits that go for 12 months (1 year) and above will all under this category. One thing about long-term FDs is that you will have to wait until the amount matures before you can take any money out.
  3. Conventional FDs – This term depicts the type of term deposits that give you a guaranteed rate of return which depends on the investment period agreed. In most cases, the term range between 1 and 60 months.
  4. Islamic FDs – Based on the Syariah principles, Islamic FDs function slightly differently from conventional FDs. Under these principles, the interest or ‘riba’ factor cannot be applied. As such, the returns are determined solely based on the performance of the bank which in other words mean that you will experience a varied profit rate.

Everything you need to know about Islamic FDs

Islamic FDs usually involve Mudhabarah Deposit packages. This is where you will typically invest your money for a fixed term with the bank. The Mudarib (or your fund manager) will then channel your money into certain investments which are Syariah-compliant. A pre-determined profit-sharing ratio will then be applied between you and the bank with which you will then receive monthly. In Mudharabah FD contracts, there are certain terms you should be aware of:

  1. Bai Al-Enah – The most common type of Islamic term deposits among investors. This is the type of contracts that are traded at a higher cost involving 2 parties known as Bai Al-Enah. Such trade usually involves assets. This type of deposit involves the uses of assets that are acceptable under Syariah principles. It does not include precious stones like gold and silver though
  2. Tawarruq – It uses a pre-determined profit rate which the bank must pay back the moment it matures.
  3. Wakalah – Here, the bank is the agent responsible for handling your funds. In other words, it will manage your assets by investing them into Syariah-allowed investments.

Other crucial terms and factors for FDs

Knowing about FDs is one thing, identifying which one works for your money is another. You need to choose wisely when it comes to the right type of FD for you. The rule of thumb is that FDs are all tiered. In other words, the more you put in and the longer the term you decide to put into the FD means you will enjoy more returns.

  1. Fees – This is the amount you have to pay for processing your FD. Some banks have hidden charges like periodic fees and processing fees. Penalty fees are very common when you decide to withdraw before maturity.
  2. Penalty Fee – depending on the bank, there is a penalty imposed for early termination. In most cases, the percentage is removed from the interest. For example, if the interest is 5% and the penalty is 3%, then you will only get back the interest of 3% when the term matures instead of the pre-agreed 5%.
  3. Break Cost – This refers to a one-time fee imposed if you break the FD contract. Different banks impose different rates for this and it is usually calculated based on your principal amount
  4. Interest rate – Malaysian banks usually give about 3-5% in interest rates for FDs. This is after all one of the most important factors when it comes to FDs. The longer you decide to put your money, the higher the rate would usually be. The same concept is applied for short-term deposits too.

Fundamentals of Fixed Deposits

The rule of thumb is this: You will have to pay a penalty if you want to withdraw your FD before it matures. All FDs come with:

  1. A pre-agreed interest rate
  2. A pre-agreed term
  3. A pre-agreed terms and conditions

Using the below as the term:

  1. 1 month – 3% interest
  2. 3 months – 3.10% interest
  3. 6 months – 3.20% interest
  4. 9 months – 3.30% interest
  5. 12 months – 3.40% interest

In this case, if you put in RM20,000 for 6 months (the interest rate at 3.20%), your return would be RM320. This will be added to your principal amount of RM20,320. In other words, in that six months, you would have earned that amount of money which is quite good considering today’s economy. This is calculated based on:
Principal amount x Pre-agreed Interest rate x (Months for placement period/ 1 year) which in the case above means:
RM20,000 x 3.20% x (6 months / 12 months) = RM320

The most sound advice you will get

The thing about FDs is that it is one of the lowest risks when it comes to investments. However, you must be clear about the duration involved and any penalties involved. As compared to the conventional savings account, FDs would be your better bet, any day!

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