Comparing returns: Retail bonds vs bank deposits
If, like many investors who are risk-averse, you have low income, your saving options can include parking your funds in the bank because they offer a promise on the principal amount as well as some sure returns. While they are definitely one of the safest options, these instruments may offer low returns on your money.
So, you may want to think lottery-style savings schemes, which combine the safety of a bank account with an added incentive: a chance to win a large prize. Such schemes have cropped up in the UAE, but critics pounce on the lack of solid guarantees for high returns.
The question is: would you rather let your money sit idly by while you wait to win Dh1 million or put it in a savings scheme that guarantees you a fixed return every year?
Banking and finance experts cannot seem to agree on the answer. In the last three years, the average interest rate on fixed deposit at HSBC was around 4 %, with the highest rate reaching 5.75 % in 2008. This year, the highest rate so far has been 3.5 %.
For James Pearson, the bank’s head of assets and liabilities, savers are better off placing their funds in high-yielding fixed deposits or flexible savings accounts such as their eSaver, which currently offers three per cent return per year.
“Broadly, lottery-based savings products offer minimal or no return, as a trade-off for a chance to win a bumper prize,” says Pearson.
Returns
Mohammad Qasim Al Ali, chief executive officer at National Bonds Corporation, disagrees. He says it is very rare to find high returns in either savings accounts or fixed deposit accounts these days.
The market average rate in 2010 was only 0.46 % for saving accounts and 2.88 % on 12-month fixed deposit accounts. National Bonds, on the other hand, distributed a 3.78 % profit rate last year. In the last three years, annual dividends averaged 4.79 %, with the highest rate recorded at 7.07 % in 2008.
“If we compare National Bonds to either of these products, it still comes out on top.” He says their product doesn’t only provide higher returns and multiple chances to win huge prizes, they also offer free life Takaful cover (Sharia-compliant insurance) and the bondholder is not required to pay any fees or charges such as entry, service, management, account statement, minimum balance or exit fees.
Bondholders also have free access to their money after 30 days, while if a saver terminates the fixed deposit too early, he could lose around one per cent on returns due to premature withdrawal fees.
Wealth accumulation
Dr Esinath Ndiweni at Heriot-Watt University, Dubai Campus, agrees with the view that the opportunity to win a prize offers a massive wealth accumulation that is otherwise unavailable through the standard savings and fixed deposit accounts.
“The fact that there are frequent draws for smaller amounts per week, and the once a month Dh1 million prize, increases the probability of winning, say the investment is held for five years. Whichever way, the low-income consumer is unlikely to make similar earnings through normal employment or savings.”
Besides, the first constraint faced by anyone with low income is that they do not have enough money to put in fixed deposits.
“Banks set certain amounts in order to qualify for both fixed deposits or call accounts. The prize-linked products suit the low-income consumers better because they involve many low-income consumers pooling their resources together.”
“The funds could then be managed by the banks who, in turn, offer profit sharing schemes to the participants. In this way, the cumulative profit earned may amount to a fair return on the investment.”
For example, HSBC requires a minimum deposit of Dh10,000 or Dh5,000 equivalent in foreign currency for a term deposit.
There are other factors to consider as well, such as inflation versus an interest rate of, say, four per cent and the opportunity to win Dh1 million. “Assuming capital is preserved, a consumer might invest Dh5,000 for a chance to win the prize. He would forgo the chance of earning four per cent interest to win the prize.
“Another key consideration, in all cases, is the profile of the customer who embarks on such schemes. Age, time horizon and disposable income are all important factors in influencing customers when making investment decisions.”
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