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:
Benefits of Structured deposits include the following:
However, they are accompanied by various risks:
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.