To use Fixed Deposit as a long term saving tool is not advisable because inflation in the long term will erode the purchasing power of your money. The effect of inflation is demonstrated in this table.
Year
|
Nominal
FD Rate
(A)
|
Inflation
Rate
(B)
|
Real
FD Rate
(A -B)
|
2002
|
4.0
| 1.8 | 2.2 |
2003
| 3.7 | 1.1 | 2.6 |
2004
|
3.7
| 1.4 | 2.3 |
2005
| 3.7 | 3.0 | 0.7 |
2006
| 3.7 | 3.6 | 0.1 |
2007
| 3.7 | 2.0 | 1.7 |
2008
| 3.7 | 5.4 | -1.7 |
2009
| 2.5 | 0.6 | 1.9 |
2010
| 3.0 | 1.7 | 1.3 |
2011
| 3.2 | 3.2 | 0.0 |
2012
| 3.1 | 2.0 | 1.1 |
10-year
Average
(2002-2011)
| 3.5 | 2.4 | 1.1 |
5-year
Average
(2007-2011)
| 3.2 | 2.6 | 0.6 |
For an asset to be useful as a tool to preserve value, it must maintain its value over long term. Financial assets such as stock, bond or unit trust and physical assets like real estate, preserve value over the long term. FD on the other hand is good in maintaining the nominal value of our saving but the real value of savings will depend on the inflation rate.
Since Malaysian generally save more and the economy benefit from this high saving level, and if global interest rate remain low, FD rate in Malaysia is expected to remain low at about current level.
So if your intend is to preserve the real value of your wealth over long term, FD is not the right saving instrument due to low rate of return relative to the inflation rate. A Bond Fund could be a better option for this purpose as it generally offer higher return relative to FD.
Thank you :-)
