In this second My Money seminar (held in Feb 2009), Frances Chan from The Association of Banks in Singapore (ABS) covered the difference between traditional and structured deposits.

Here’s a summary of her presentation.

There are three types of traditional deposits, namely: Transactional, Special Savings and Fixed/Time Deposits. The financial crisis in 2008 saw many of us asking the same question: How safe is my money?

For both traditional and structured deposits, you are exposed to the default risk of the bank.

For traditional deposits, your money is also protected by deposit insurance (up to $20,000 per individual) and fully covered by the Singapore Government Guarantee (till end of 2010). More information the deposit insurance scheme can be found on the Singapore Deposit Insurance Corporation website.

Structured deposits are issued by the bank and are not to be confused with traditional deposits. They offer protection of principal with potentially higher returns than traditional deposits but are not risk free. Your money is usually invested in 2 components – Bonds or money market instruments and also linked to exposure of different underlying assets/markets in order to have a potential of additional upside.

If the underlying assets do not perform as expected, you may receive just your principal upon maturity which mean you would be worse off compared to just leaving the money in a traditional deposits.

Features of structured deposits include the following:

• Tenors: Structured deposits have maturity periods lasting from a year up to 10 years. When investing, the main consideration you should consider is the length of time you are able to set aside for investing and whether the issuer has the option to redeem the deposit early.
• Principal protection
• Offer period: They are offered in tranches which has either a fixed offer period or are available til the tranche is fully subscribed.
• Investment returns: It is important to note the maximum/minimum returns of the product, how returns are linked to the underlying asset/markets and the worse case scenario.
• Other features: Option for early withdrawal and the various costs involved.

Benefits of Structured deposits include the following:

• Diversify risks and enhance yields
• Offers potentially higher returns
• Exposure to assets/markets not easily accessible by retail investors
• Protection of principal

However, they are accompanied by various risks:

• Liquidity risks: Investing funds in structured deposits usually ties up your funds for a period of time. An early withdrawal may result in the loss of part of your returns and/or principal.
• Issuer risks: Are you comfortable with the credit standing of the bank offering these structured deposits?
• Market risks: Structured deposits are linked to underlying assets/markets, hence their performance are determined by the performance of these underlyings.
• Reinvestment risks: Where the issuer is allowed to exercise the early redemption option, you may be exposed to the risk of having to invest your money at a lower rate compared to when you first invested and the maximum returns received may also be capped.

Whether an individual chooses a structured or traditional deposit depends on his/her risk profile and preferences. Traditional as well as structured deposits both have their roles to play as key parts of a well-diversified portfolio.