How Step-Up Fixed Deposits Work

What good is a cash reserve that’s sitting idle in your bank account and not growing over time without your constant investment? It’s only worth what you put in each time. If you’re not interested in taking any kind of risks when it comes to your finances, a fixed deposit can prove to be the right investment tool.

What is a Fixed Deposit

Alternatively known as a term deposit or time deposit, a fixed deposit is a savings account that lets you earn guaranteed returns at a fixed rate of interest if you keep your money invested for a pre-decided tenure.

Unlike a regular savings account that generates daily interest, FDs offer fixed returns only once the deposit attains maturity. So, if you decide to withdraw your cash before the end of the FD’s term, you won’t be paid any interest either.

What Do You Mean by a Step-Up Fixed Deposit

All banks in Malaysia offer standard FDs where all you need to do is deposit your money into an account for a fixed period – anywhere between 1 and 60 months. Once the account matures, you’ll get your principal back along with the guaranteed interest.

To spur low-risk investments among customers, banks can also come up with promotional offers on FDs. Step-up FDs are one such promotion that you’ll come across when you wish to invest money.

In short, a step-up FD works like a stairway in the sense that the entire duration of your investment is divided into smaller tenures. Each small tenure comes with its own rate of interest that increases as the investment term increases. In these promotions, banks usually advertise the highest rate, which is the rate of interest for the last divided tenure.

How Does a Step-Up FD Work

The whole point of the step-up FD is to encourage you to keep your money in the account until the maturity date. But, the problem is that the effective interest you earn on such deposits ends up being much lower than what’s promoted.

For instance, imagine that you’re being offered a step-up FD promotion that promises an interest rate of up to 6.5% for a fixed period of 6 months. A closer look at the fine print shows you that the interest rate for the first two months is 3.15%, the next 2 months is 3.4%, the fifth month is 4%, and the last month is the advertised rate of 6.5%.

But, when you determine the effective interest rate – the average interest rate for the entire tenure – on this deposit, you’ll see that the result – 3.93% – is way lower than what was promoted. So, the next time you come across a promotional deposit like the step-up FD, be sure to check all the numbers involved so you’re not disappointed with the returns on maturity.