Let’s imagine you have about RM500 to set aside monthly.
Should you then put your money into a Fixed Deposit account or an Investment-linked plan?
Before you decide, it’s important to understand how both options work.
I’ll be referring Fix Deposit as FD and Investment-Linked Plan as ILP.
What is it?
FD: A low-risk financial product where you deposit a lump sum amount with a bank or financial institution for a fixed period at a predetermined interest rate.
ILP:Combination of investment and life insurance elements that allows you to invest your money in a selection of investment funds, providing potential for higher returns, while also offering life insurance coverage to protect your loved ones.
How does it work?
FD:You make a lump-sum deposit at the beginning of the term and cannot add more funds during the tenure.
ILP:Option to pay/contribute a lump sum upfront or via regular intervals.You can choose to contribute monthly, quarterly, or annually, depending on your financial capacity.
Risk Level
FD: FDs are low-risk investments with fixed interest rates. You do not have investment options like in ILPs, where you can choose from various funds.
ILP:Offers the flexibility to switch between different investment funds within the policy. This allows you to adjust your investment strategy based on market conditions or changes in your financial goals.
Return of investment
FD:Fixed return on the agreed interest rate. Conservative returns as compared to other investment products. According to RinggitPlus, current fixed deposit rates range from 3% to 3.5%.
ILP:ILPs provide the opportunity for higher returns compared to fixed deposits, especially over the long term. They invest in various assets like stocks and bonds, which have the potential to outperform fixed deposit interest rates. Our average fund returns between year 2017-2022 is at 7%.
Flexibility
FD:If you need to withdraw the funds before the maturity date, FDs typically come with penalties, and you may lose a portion of the interest earned.
ILP:We allow partial withdrawals after the lock-in period. This offers some liquidity.
Added benefit
FD:NONE
ILP:Gives you extra protection and benefits, such as waiver.
Conclusion
In summary, ILPs offer the potential for higher returns and life insurance coverage. Fixed deposits provide guaranteed returns and capital preservation but offer lower returns and limited flexibility.
The choice between the two depends on your :
- risk tolerance,
- investment goals, and
- time horizon.
Diversifying your investments across different asset classes may help balance risk and returns in your overall portfolio. It’s essential to assess your individual financial needs and consult with a financial advisor before making any investment decisions.