Opening a fixed deposit banking account or contributing to the Employees Provident Fund (EPF) are two investment or saving options readily available to people in Malaysia.
How does a fixed deposit compare to EPF when it comes to giving the best returns? Which has more benefits and which has more risks? The following will help you compare.
- Interest/dividend rates
Both EPF and fixed deposits use your savings to fund business activities that generate profit – this is shared back to you either as interest or dividends.
The EPF dividend rate is declared after the end of the financial year, typically during the first quarter of the following year. Since 2000, EPF dividend rates have been in the range of 4.25% and 6.75%. Additionally, as the EPF is a government-supported social security scheme, it guarantees a minimum dividend rate of 2.5%.
Fixed deposits are much more predictable in the sense that the interest rate is determined from the day you start saving. Interest is returned to the holder once the fixed deposit matures. In Malaysia, fixed deposit interest rates can start at 2.75% for a one-month term.
In most cases, the higher the potential rate of return, the higher the risk of investment. The same can be assumed when comparing EPF to fixed deposits, in that EPF participates in slightly riskier investments than fixed deposits. Fixed deposits are generally considered safe and secure.
- Investment Period
How long your funds are “locked-in” can determine whether or not you are able to use them to capitalise on better opportunities as they come.
The EPF is meant to provide you with financial stability after your working life, and is therefore only released after your retirement. Depending on your age, this means that your savings can be held potentially for decades before you are able to access them.
Of course, there is some flexibility and portions of your EPF may be withdrawn for personal uses such as settling housing loans or health expenses. However, these require approval and are generally limited to secondary accounts holding smaller portions of the savings.
Fixed deposits, on the other hand, have much better accessibility. Generally, the interest rates offered are on a 12-month maturity but there are several banks offering good returns on shorter periods. One bank is offering 3.80% per annum on a 9-month Fixed Deposit account, which is among the best rates for a fixed deposit in Malaysia.
In times of emergency, a fixed deposit can be easily withdrawn (causing only the loss of interest). Another benefit of this option is that you can also use your fixed deposit as collateral for credit facilities such as loans.
- Maximum contribution
The EPF works on a fixed rate of contributions from yourself and your employer against your monthly salary. Although you may make additional voluntary contributions, you are capped at RM 60,000, thereby limiting your potential returns.
Banks typically do not set a maximum limit for fixed deposits, though you may be required to open extra accounts and there will be a limit to the amounts insured. Nevertheless, this means that you could potentially get more returns on larger savings with a fixed deposit.
Whichever option you eventually settle on, the positive thing is that it’s never too late to save. Just make sure that you’ve understood the full terms and conditions before committing to any plan.