The Time Deposit (also called Fixed Deposit) is the most basic product of any bank. Before loaning their money out to customers, banks first need to gather customer deposits in the form of bank accounts and fixed-return products. Although savings and current accounts tend to be sticky deposits which customers tend not to withdraw, they can be withdrawn at any time. Time deposits are held for a set period of time (usually 1, 3, 6 or 12 months) with a penalty for withdrawing the money early.
This enables banks to lend that same money over set periods also and is pretty important in managing the balance sheets of large banks.
For consumers, it is the first product we think of when we have some cash to put away at the end of the month and are looking for a better return than the one we would find on our current or savings accounts (or maybe just a place to lock the money away to avoid temptation…).
A few things to consider when you decide where to put your money:
How frequently do you need to be paid interest?
If you’re just starting off on the savings journey this may be less relevant to you so it’s wise to set up a 1-month time deposit so that if you do need to access your deposit there is not too long to wait till maturity.
For those with larger deposits it really depends on whether you need a monthly income from your deposit. If you do, then in this low interest rate environment you won’t be getting the best returns from your investment and you should consider speaking to a specialist wealth adviser to see how they can make your money work harder for you.
If you’re confident on keeping part of your wealth in cash (a balanced portfolio is important after all), then you should choose to have either a monthly interest payment so you can see your savings accumulate, or an interest paid at maturity.
How is interest calculated on a Time Deposit
In Hong Kong, interest rates differ according to tenor (or time) over which you fix the deposit. For example, the interest rate offered by HSBC for a 1-month time deposit is 0.01%, while the rate of a 12-month deposit is 0.15%. Also, the rates will vary depending on the amount placed.
The one thing to remember is that the rate quoted is always an annual rate
This means, for a HK$100,000 investment placed for one month, the total interest earned on your time deposit would be:
HK$100,000 x 0.01% (0.0001) = HK$10 ÷ 365 (days in the year) x 30 (this number should represent the days in the month over which you have placed the money)
So the interest payable on your deposit after one month will be HK$0.82
Obviously that doesn’t sound very attractive but by shopping around you could earn 10x as much. Check out http://www.bestmoney.hk/en/fixed-deposits-and-time-deposits for more information
Auto Rollover or Renewal
Most time deposit accounts have an auto rollover or renewal facility whereby the bank will automatically reinvest your money (which may include any interest earned) into a new time deposit investment once the old investment reaches maturity. Sometimes you as a customer may select this. Be warned that most banks will roll your deposits over to a much lower rate than the one you originally had. So forgetting about your deposit can prove to be a costly decision over time.