• Time Deposit vs Mutual Funds - Which is Better to Invest?

    Everyone seems to have an opinion when it comes to decide: ‘How to save your money?’. Over the last few generations, we Filipinos have come to know and trust savings and time deposits as a great option for saving our money and getting returns thanks to the interest rates applicable. Although this is a nice safe option, today with the global economic scenes changing so fast, you must be aware of the other options that you have.

    The sense of security that comes with putting your monthly savings into a time deposit is understandable because it means that you have a backup stash that you can dip into in the event of emergencies. However, what if you could get more out of your savings than just the interest rate that your bank offers? This is possible with mutual funds.

    Putting your money into mutual funds is a great option if you are looking into the future whether it is for retirement, a business idea, your child’s education, the dream vacation etc. A long-term financial instrument such as mutual funds will make your money grow much faster than a short-term financial instrument like time deposit.

    So ideally, you should go for a combination to meet your long and short term needs. Going for a long-term financial instrument means that your money’s value is increasing at an excellent rate. Also, it will help you combat inflation, as well as the general increase in prices of commodities/services.

    If you have been going for time deposits because it is safe (since the amount that we deposit will remain intact, while you receive a guaranteed interest), it’s time to rethink! Inflation is a great culprit when it comes to the reason you will not receive the interest that you initially thought was guaranteed. Inflation will slowly but surely deplete the value of money. For example, if a time deposit gives 1% annual interest and the inflation rate is 3%, the real value of money would now have shrunk by 2%.

    So, if you want to beat inflation and be prepared financially for the future, you should definitely consider moving a portion of your money from your savings/time deposit to mutual funds. The answer to which kind of savings is best is both time deposits and mutual funds. Time deposit will take care of immediate expenses/short-term needs while mutual funds take care of long-term goals. The objective and time frame for each is different.

    Here is a quick look comparing the features of Time Deposit and Mutual Funds:

    Time Deposit Mutual Fund
    What is it? It is a bank deposit, which has a guaranteed interest rate over a specific period of time A mutual fund pools money from different investors and invests it in various securities such as bonds and stocks. Its returns come from the appreciation of the fund’s underlying investments.
    Who offers it? Banks Asset management companies
    How much is the minimum investment? Starts at P 1,000

    P 5,000 – initial investment

    P 10,000 – Subsequent investments

    Are the earnings guaranteed? Interest rates are guaranteed on time deposits. However, these usually provide modest returns. Returns are not guaranteed. Fund value may fluctuate depending on market conditions. But based on past performance, mutual funds have performed better than time deposits. This is why mutual funds should be held long-term.
    How much will I earn? Interest rates range from 0.5% to 1.125%. The higher the amount and the longer the terms of placement, the higher the interest rate.

    Returns depend on the type of fund and investment period.

    Typically, the higher the risk and the longer you stay invested in mutual funds, the higher the potential returns.

    How long should it be kept with the financial institution? Terms of placement are: 30 days, 60 days, 90 days, 180 days, 360 days. Although there is no required time, mutual funds are best held long term (i.e. 3 to 5 years)
    Can I withdraw my investment should I need it for an emergency? Yes, but there are penalty fees imposed for early withdrawal.

    Yes, but you may incur withdrawal charges depending on the sales load structure you chose when you invested in mutual funds.

    For back-end sales load, there are declining exit fees, ranging from 5% to 1%, when you withdraw within the first five years of your investment.

    How much are the taxes to be imposed on my earnings? 20% withholding tax on the earnings. Capital gains realized from the redemption of mutual fund shares are exempt from income tax under the Tax Code.
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