Sunday, October 4, 2015

CIMB Showdown: FastSaver VS Step-Up Fixed Deposit

I think regular readers would know that I have a very strong liking for CIMB recently with their range of no-frill products.

Their Step-Up Fixed Deposit has always been an interesting product to me. Basically, at the end of every month you can decide if you need to withdraw your money, and you would still get accrued interest instead of forfeiting in an event of a withdrawal. I like this key flexibility option.
(2015 review of their 18 month Step-Up FD outdated)
(2013 review of their 12 month and 5 year Step-Up FD outdated)

Their recent FastSaver account is a no-frills "high" yield online bank account. With 1% on the first $50,000 of deposits, there is no other bank offering such a high rate without any hoops to jump through. As per usual, interest is paid at the end of the month.

Now, both of these products are great options for cash. However, if you have $25,000 (the minimum to start a fixed-deposit with CIMB), where should you put your money?

From my study, as long as you probably need the cash within 7 months, it is probably better to keep it in the FastSaver account.

However, if you think that you would need the money only after 7 months, putting it in the Step-Up account would be better.

Intuitively this makes sense. There is a premium for having the flexibility to withdraw immediately on demand, which is why locking in your money and committing to not touch it for a certain period will give you a better yield.

Besides time, another consideration is capital. Not many people have $25,000 to drop into a fixed deposit product. In that case, you benefit by not even having to make a choice. Between these 2 products, you can only use the FastSaver.

The SSB comes in if you are need to hold onto cash and cash alternatives (you cannot risk the capital value at all) but your holding period is longer than 3 years. The current 3-year SSB yield is 1.48% pa, which is very close to the 1.44% of the FD 1-year ending yield. Rolling into similar rates would marginally beat the SSB for the first 2 years, come in very close in the 3rd year, then steeply fall behind the SSB from the 4th year onwards.

The fixed-deposit market is getting squeezed on both sides right now.

On one side, we have cash that is yielding higher through no-frill accounts like the FastSaver and also through special accounts like the UOB One and OCBC 360 account.

On the other side, we have "special bonds" in the form of the SSB that guarantees capital value upon redemption, relatively liquid (redeemable the following month after you place the redemption order) and yet very decent yields which increases over time.

The choice between cash vs fixed deposits vs SSBs is not an easy one to make, especially if you are very unfamilar with the products and their respective pros and cons. This choice is a very personal choice and it depends largely on your financial situation and goals.

Personally, I am not at the stage where I am risk-adverse and are trying to protect my wealth and preserve my purchasing power. Therefore SSBs and FDs are not part of my long-term plan. I am holding cash not because I believe that it will outperform in the long run as an asset class, but because I believe that there are few other attractive asset classes at these valuations.

I am in the stage of asset accumulation and cash happens to be the easiest way to purchase assets. I want to accquire assets earn in life so that they can work for me and give me good returns in the future. Another use for my cash is to prepay for future expenses now if it is cheap to do. The good example that I can think of is buying your maiden home. (note: I used the word home. A home is NOT an asset. It is an expense.) I would imagine people do not want to be burdened paying rent and being at the mercy of landlands when they are retired. Buying a home is essentially prepaying all your rent. Do you want to prepay when rental rates are low (housing is cheap), or when rental rates are high (housing is expensive)? I prefer prepaying when it is low.

Generating income from assets or saving money by prepaying expenses at a cheap rate results in the same thing. What is the end result? More money.

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