Recent years, many "attractive, innovative, new" financial products have been provided to "fulfil the needs of consumers". Interestingly, all of them always loses their "charm" for me after I take few minutes to get the most crucial information I want to know - Effective Return Rate.
Typical Examples of "attractive, innovative, new" financial products
There are lots of financial products in the market, from Insurance to Fixed Deposit. In the following context, I am going to talk about Insurance and Fixed Deposit.
For the case of insurance, normally, you will be told that you will receive regular "return" annually after putting certain amount of money in certain period such as 6 years. The amount normally appears to be attractive. However, after you ask them to give you the Effective Return Rate that can computed using Internal Rate of Return (IRR), they may find many reasons to tell you that the product does not have Effective Return Rate. This only indicates that they have very limited knowledge about their product. What a shame!
So far, what I know is the product normally has Effective Return Rate less than 4%. Of course, this kind of insurance products does provide insurance protection. Nonetheless, my question is - if we already have many insurance options that can fulfil our risk management need with much affordable price, what is the rationale for us to reduce our liquidity for many years in order to have that 4% return!
Besides, we also need to bear the risk of breaching the contract when you need the money suddenly.
As we know, current Fixed Deposit rate in Malaysia is around 3% for one month, and up to 3.7% for 12 months, according to BNM website as follows.
"The minimum rates for fixed deposits with tenures between 1 and 12 months for balances of RM1 million and below will be prescribed at the current prevailing levels of 3% for the one-month deposit and 3.70% for 12-month deposit. The minimum fixed deposit rates are being prescribed to ensure that depositors have a positive real rate of return." (Last Updated Date : 18 October 2013)
However, it should not be surprised that most of the banks only give around 3.15% for 12-month deposit. This because the rate of loan is also much lower than what BNM requires. Of course, what BNM requires is a benchmark. In other words, bankers still have some degree of freedom to adjust the rate to suit their business strategy.
After having some briefing about current Fixed Deposit rate and practise in Malaysia, let's once again reveal the "story" of some Fixed Deposit products in the market.
First, we do see many promotional Fixed Deposit product or plan in the market. Some of them use "Step Up Rates 4%" or "Get Up to 4%" for 12-months. It appears to be quite attractive compared to those 3.15% interest for 12-months and 3.00% interest for 1-month. However, using Effective Return Rate, nothing is so attractive at all.
Luckily, I do see the Effective Fixed Deposit Rate for 12-month tenure is given in the brochures I have in my hand now. Supposedly, this should be one of the requirements from BNM. Well done, I must acknowledge what BNM has done so far to make the financial products in the market to be more transparent.
Of course, if 3.5% Effective Fixed Deposit Rate for 12-month tenure is a good deal for you, then you may consider this kind of product. Again, my objective is to share my insight to help those who want to have better understanding about this kind of attractive financial products in the market. I believe that with sufficient reliable information, you should be able to make a wise decision that suits your need in the long term.
That's all for today. Based on my experience, once I ask those agents about the Effective Return Rate of the financial products (mostly insurance saving plan) that they introduce me, most of them become less confidence to convince me any more. More fascinating articles and sharing will be updated weekly in Xaivier Blog. So, you are welcome to subscribe our feed to receive our weekly updates
Written by: Xaivier Chia
P/S: The above sharing is solely based on personal insight and information that believed to be reliable. Your valuable feedback are very welcome.