High deposit rates are hogging the headlines, but the fine print tells another story
INVESTORS have been spoilt for choice in recent months on where to park their money, be it in government bonds, which have seen a surge in popularity, or attractive fixed deposits.
After all, there is a keen desire for investments that can deliver positive, real returns as inflation continues to weigh on consumers. It is therefore not surprising to see marketing materials for investment products trying to tap that desire.
The rise in aggressive marketing should, however, be a reminder for investors to conduct due diligence on financial products to ensure they are getting the returns they hope for.
They should not react blindly to flashy headline numbers, and should instead pay attention to the effective returns on their investments – as well as the conditions that can affect those returns.
Most recently, UOB made headlines when it lifted the maximum bonus interest rate on its flagship One Account to 7.8 per cent from 3.6 per cent on Dec 1 – following similar moves by rivals DBS and OCBC in the months before.
But closer inspection shows that the 7.8 per cent figure is only a partial truth, like a close-up photo of Quasimodo’s good side on a dating app.
In the case of UOB, savers will never receive the full 7.8 per cent interest rate that headlines marketing materials because the One Account uses interest rate brackets that apply different rates to each additional dollar above certain thresholds.
The first S$30,000 in the account accumulates interest at 3.85 per cent per year, but the next S$30,000 draws interest at 3.9 per cent per year. This means the effective interest rate for the first S$60,000 in the account is 3.875 per cent.
While the headline rate for the account is 7.8 per cent, the maximum possible effective annual interest rate on the account is only 5.00 per cent. And, this latter rate is only achieved when a S$100,000 balance is maintained. Customers also need to meet the monthly criteria of S$500 in eligible credit card spend and a minimum S$1,600 salary credit via Giro or PayNow.
For comparison, DBS’ flagship Multiplier Account offers a maximum interest rate of up to 4.1 per cent a year for the first S$100,000. This is provided the customer transacts in three categories with a total volume of S$30,000 or more in eligible monthly transactions.
OCBC’s 360 Account pays up to 4.65 per cent a year on the first S$100,000 in a customer’s account when they credit their salary, save and spend with the bank. The interest rate is 7.65 per cent a year for OCBC 360 customers who also invest and buy insurance through the bank.
Savers also need to bear in mind the numerous conditions they need to fulfil in order to receive those flashy returns. Buying investment and insurance products from a bank and maintaining a large deposit amount just to receive a few more percentage points of interest from your savings account may not be the optimal investment strategy for everyone.
The old wisdom that one should always understand the product before investing in it is as true today as it was when applied to structured products in the run-up to the 2008 global financial crisis. If something appears to be too good to be true, it very often is.
