1.428%. Any Idea how that relates to the title? Well, that’s the average return on a 1-year time deposit (check this link: https://philippines.deposits.org/deposits/). Too small right? (Yes!) As you know, owning a time deposit account has its pros and cons. And, you should also take account where to put your money (not just saving it) to protect yourself from future financial crisis. I’ll discuss some of it below.
First, we want to know what a Time Deposit (TD) is. It is a type of investment account that earns a fixed interest rate over a period of time like a year or a couple of months. You basically make money thru interest payments when the maturity period comes.
Once you avail of it, your bank will provide you with a proof of ownership. Depositing a more substantial amount will increase the interest rate per annum. However, the changes are a little insignificant.
Here’s an example from one of BDO’s Peso Time Deposits. (https://www.bdo.com.ph/personal/accounts/peso-time-deposit/time-deposit) By the way, you can have Dollar Time Deposits too. (varies with Banks)
The bank has a minimum placement of ₱1,000.00. It has different terms of placement (holding period) to choose from like 90,180 and 360 days. Now, let’s use 360 days (equivalent to 1 year) as our term of placement, investing ₱25,000.00 for one year.
From the range of ₱10,000.00 to below ₱50,000.00, the interest rate is 0.625%. When the maturity period comes, you will have a total of ₱25,156.25 (25,000 x 1.00625) in your account. You just earned by doing nothing; that’s money working for you.
Based from the website, interest rates are indicative and are subject to change without notice. So, confirm it with the branch before you start.
You may ask, “Are there service fees and charges?”
This Time Deposits (TD) account is subject to a 20% withholding tax on interest earned (no exemption from TD) and also a pretermination penalty (The branch will discuss further).
You might be feeling that the returns from this investment account are too small. Having this account provides low risk and low return. However, this is one of the safest types of investments which, as I’ve said, has a lower risk profile than owning stocks. It is easy to open and maintain (Go to the nearest Bank you want to start with). Another convenience is selecting the terms of placement based from your preferences. Some banks will pay you either by check or deposit straight to your account.
There is also negative effect in having Time Deposit accounts. Funds cannot be withdrawn until the end of the terms of placement because you will have pretermination penalty (you’re losing money). It is subjected to tax (20% final withholding tax on the interest earned). Finally, our mortal enemy – inflation (an increase of price levels over a period of time) – will devour your returns from Time Deposits. Why? In the next article, we will discuss it with you and how you can win against high inflation.
You might ask yourself: Is this right it for me? Well, it depends on your risk profile. Risk profile is an evaluation of one’s ability to take risk (You may consult your Financial Advisors). It is vital to determine this because it will help you know what investments you should allocate in your financial portfolio.
There, you have it! A low risk and low return investment in achieving your financial goals. There are other investment assets to choose from and we will discuss them soon.
Disclaimer: We want to remind you, dear reader, that the content in this column is my opinion and AlphaEdge Research’s opinion only and should not be construed as investment advice because we’re not your financial adviser nor have we taken into consideration your personal objectives, financial situation, needs or circumstances as your fiduciary. This column is mainly for your entertainment and education only.