Monday, August 15, 2011

Comparing Yields: Retail Bond Against Bank Deposits

If, like many investors who are risk averse, you have a low income, your storage options include parking your money in the bank because they offer the promise of capital and a safe return. While they are certainly one of the safest options, these instruments offer a low return on your money.

So you can think of savings plans like the lottery, which combines the security of a bank account with an additional incentive: a chance to win a great prize. These schemes have emerged in the Emirates, but critics pounce on the lack of firm guarantees high yields.

The question is: would you rather your money sit idly by while DH1 expects to earn dollars, or put it in a savings plan that guarantees a fixed return each year?

Banking and financial experts do not seem to agree on the answer. In the last three years, the average interest rate on fixed deposits with HSBC about 4%, with the highest rate to 5.75% in 2008. This year, the highest rate to date was 3.5%.

James Pearson, head of the bank's assets and liabilities are better off savers to invest their funds in high interest deposits or savings accounts such as flexible even Esav, which currently offers three percent return per year.

"In general, a lottery-based savings products offered little or no return, because the trade-off for the chance to win a bumper prize," says Pearson.


Mohammad Qasim Al Ali, CEO of National Government Bonds, all right. He says it's very rare to find a high performance or savings account or fixed deposit accounts of those days.

The average market rate in 2010 was only 0.46% for savings accounts and 2.88% at 12 months fixed deposit accounts. National obligations, on the other hand, distributed a rate of 3.78% of profits last year. In the last three years the average annual return of 4.79%, the highest price quoted to 7.07% in 2008.

"If we compare the national bonds to one of these products, it is still at the top." He says their product will not only provide better performance and a host of opportunities to win big prizes, they also offer free life cover Takaful (Sharia-compliant insurance), and the bondholder should not pay taxes or fees, such as subscription, service, management, bank statement, at least the balance of payments, or to leave.

Bondholders also have free access to their money after 30 days, whereas if a screen saver ends fixed deposit prematurely, it could lose about one percent of income due to premature withdrawal fee.

Wealth Accumulation

Dr. Esinath Ndiweni at Heriot-Watt University, Dubai Campus, agrees with the idea that offers the chance to win massive accumulation of wealth that is not available through standard savings account time deposits.

"The fact that ties are common for small amounts weekly, and monthly price of a million DH1, the probability of winning, say the investment is held for five years. No matter how low-income consumers are unlikely that similar gains through regular employment or savings account. "

In addition, the first requirement for anyone with low incomes is that they do not have enough money to put in fixed deposits.

"The banks to set certain fixed amounts for both deposits and bank accounts. The award-insurance products are suitable for low-income consumers with better, because they contain many low-income consumers for their resources together."

"The funds could be managed by the banks, in turn, offer profit-sharing formulas for the participants. In this way, the accrued benefit obtained may amount to a return on investment."

For example, HSBC requires a minimum deposit of DH10, DH5, or 000, 000 equivalent in foreign currency for a time deposit.

There are other factors to consider, such as inflation or interest rates, say, four percent and the chance to win Dh1 million. "Assuming capital is maintained, the consumer can invest in DH5, 000 chance of winning a prize. He has avoided the opportunity to earn four percent interest in the prize.

"Another key factor in all cases the customer profile that engages in such plans. Age, time horizon and disposable income are important factors to influence customers in their investment decisions."

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