Should you take out your FD?

Should you take out your FD?
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KUALA LUMPUR (Sept 15): Bank Negara Malaysia (BNM) has cut the overnight policy rate (OPR) to record low levels this year in a bid to accelerate the pace of economic recovery amid the Covid-19 outbreak, which has resulted in lower fixed deposit (FD) rates at all banks in the country.

These unprecedentedly low interest rates have affected many investment plans and return projections, according to financial services advisory firm FA Advisory Sdn Bhd's general manager Bryan Zeng.

“This has forced many investors to scramble for higher yield investments such as stocks, otherwise their investment objectives may not be met,” he told The Edge, adding that equities are among the most popular options, next to investment assets like real estate investment trusts (REITS), bonds, properties and other hard assets.

“Cash is probably the least attractive option in this low-interest rate environment. Just keep enough cash for liquidity needs and invest the rest,” Zeng advised.

However, stock investments carry a much higher risk and volatility than cash and bonds, thus this may not be suitable for investors with a low risk appetite, said Zeng. Hence, he recommended the adoption of a diversified portfolio across a broad range of assets, ideally with low correlation to each other, to minimise volatility.

He also warned against chasing after performance or “hot” stocks, as some have run far ahead of their fundamentals such as the rubber glove and technology stocks.

“This is not sustainable and there is a high risk of a pull back. We do not want to buy high and sell low,” he said.

While expectations on returns are definitely lower, given the prevailing interest rates and dampened forecasts of economic growth, investors can still be on the lookout for undervalued assets, blue chip stocks or REITs, he added.

Zeng said these assets, as well as hard assets such as prime properties and commodities, are poised to rise sharply once the economy recovers and when inflation kicks in.

Meanwhile, Kevin Neoh, a licensed financial planner at VKA Wealth Planner Sdn Bhd, said investors need to have a buffer of at least six months before moving away from FDs or other risk-free assets, but added this also depends on the circumstances of each individual investor.

“If you decide to move from risk-free assets into riskier assets, you have to acknowledge that different asset classes have their own risk-return characteristics,” said Neoh.

If one is looking for a slightly higher yield than FDs, Neoh said managed funds that invest in a portfolio of high credit rating securities could be an option.

This potentially offers a slightly better yield, although there is bound to be some volatility as the fund will be valued on a day-to-day basis.

A balanced fund — a portfolio of fixed income with a small allocation in equities — could offer even higher yield, Neoh said.

“This may not provide you with full equity returns but again, the aim is not to maximise return but to have a slightly better yield and exposure to equity at the same time. It gives you the best of both worlds,” he explained.

If an investor is looking for even higher returns in the current environment, and is willing to take on higher risk, Neoh recommends investing in a portfolio of high dividend yielding stocks.

REITs are also an option for consistent dividend yield, he pointed out, although the Covid-19 pandemic may affect the rental income of REITs and therefore, investors need to be mindful of the type of REITs they are adding to their portfolio, he added.

For those looking for an alternative to FDs due to their unimpressive returns, Whitman Independent Advisors Sdn Bhd founder and managing director Yap Ming Hui said the closest instruments would be money market funds and bond funds managed by unit trust companies.

Money market funds generally provide a return of over 2%, he said, which is more attractive than the current FD rates, while bond funds give a return of 4% to 5% per year, which is more than double the current FD rates.

“These are the two instruments that are the closest alternatives to the FD. However, investors should not move their entire investment from FD to a bond fund, for example, as the idea is to spread the investment across asset classes,” he said.

Asked if investing in properties should be considered, given the low interest rates, Yap said it would be challenging if buyers are buying to flip, as there could be a slew of properties up for sale and being auctioned off in the current environment, more so once the loan moratorium period ends on Sept 30.

“If you want to have property as an investment, it has to make up less than 40% of your portfolio. Some investors out there are property-heavy, with properties making up about 80% of their portfolio. They will be facing cash flow problems for sure,” Yap said.

On the other hand, for those looking to purchase their first property, he said they should wait until after the end of the moratorium period for they will be spoilt for choice then, as there will likely be an increase in properties sold in the secondary market, as well as being auctioned off.

Tan Choe Choe