You will be able to explain a fixed deposit's terms and check whether it falls under deposit insurance.
Farah's aunt has kept money in fixed deposits for thirty years. When Farah asks her what rate she is getting, her aunt is not sure. She placed it years ago at a good rate, and the bank has rolled it over ever since. When they log in together, the deposit is still there, still renewing every twelve months, now at a rate far below what the same bank is offering new customers. Nothing went wrong. Nobody told the bank to do anything different.
A fixed deposit is the simplest product in this course, and that is exactly why people stop paying attention to it.
A fixed deposit is money you lend to a bank or finance company for a set term, at an interest rate fixed on the day you place it. The term might be one month, six months, a year or longer. You agree not to touch the money until the term ends, and the bank agrees to pay you the stated rate for the whole term.
It is the same idea as the bond in lesson 1.1, A bond is a loan with a fixed timetable: a face value, a rate and an end date. The differences are that you cannot sell a fixed deposit to anyone else, and the borrower is a bank rather than a government or a company. How money works, lesson 1.2, How a bank earns the interest it pays you, explained why a bank pays more for money it can count on keeping for a fixed term.
Here is a made-up example. Say the aunt's deposit is S$40,000, placed for 12 months at 3.0% a year. At maturity she receives her S$40,000 plus S$1,200 of interest. Had the term been six months at the same yearly rate, she would have received half a year's interest, S$600.
For most terms of a year or less, interest is paid at maturity in one sum. Longer deposits may pay part of the interest along the way. The bank's terms for that product will say which, and it matters if you are building a payment table like the one in lesson 1.4.
The rate on a fixed deposit is usually quoted per year, even when the term is shorter. A 3% rate on a three-month deposit does not pay 3%. It pays about a quarter of that, for a quarter of a year. Reading it any other way is the most common mistake people make when comparing short deposits.
On the maturity date, the bank does whatever your maturity instruction says. You usually choose one of three when you place the deposit: pay the principal and interest into your account, renew the principal and pay out the interest, or renew both.
If you choose nothing, many banks renew automatically. The renewal is for the same term, at whatever rate the bank is paying on that day for that term, which is often its ordinary board rate rather than any promotion. Board rates can be far lower than promotional rates, which lesson 5.2 covers.
That is what happened to Farah's aunt. Suppose the board rate on renewal is a made-up 0.5%. Her S$40,000 would earn S$200 in the next year instead of the S$1,200 a promotion might have paid. The difference only shows up if someone checks.
Singapore dollar deposits are covered by the Deposit Insurance Scheme, which the Singapore Deposit Insurance Corporation, SDIC, runs. If a member bank or finance company fails, eligible deposits are repaid up to a limit per depositor per member. The current limit and the list of members are on the SDIC website. The limit has changed over time, so check it rather than relying on a figure from memory.
Eligible Singapore dollar fixed deposits are covered, along with savings and current accounts. Three things are worth checking. First, foreign currency deposits are not covered, even at a member bank. A US dollar fixed deposit sits outside the scheme. Second, structured deposits, whose return is linked to something like an index or exchange rate, are not covered either. Third, the limit applies to all your eligible deposits at one member added together, not to each account separately.
The full detail is in How money works, lesson 1.3, What SDIC deposit insurance covers and what it does not. For this course, the practical check is simple. Before you place a large fixed deposit, confirm the bank is a scheme member, the deposit is in Singapore dollars and not structured, and your total at that member stays within the limit.
Farah sat down with her aunt and wrote out the basics for the deposit: which bank, the rate, the term, what the bank was told to do at maturity, and whether it was insured. It took ten minutes and turned a forgotten account into a decision they could make. Do the same for one fixed deposit you hold, or one you are thinking of placing.
For one fixed deposit you hold or are considering, record the bank, rate, term, maturity instruction and whether it is SDIC insured.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).