Personal Finance: FD-unit trust: Read the fine print
By Lim Ai Leen

Apicture may paint a thousand words, but a recent print advertisement that has high interest rate numbers next to the words “fixed deposit” may not be telling enough. Some local banks are offering retail investors a fixed deposit (FD) account with a difference — interest rates ranging from 8.88 to 35 per cent per annum (pa) for tenures from one to 12 months. These eye-catching rates, however, come with unit trust investments attached.

The FD-unit trust is not a new “product bundle”, with institutions like RHB Bank Bhd and Hong Leong Bank having launched their versions as far back as 1997 and 1996, respectively. While this type of product has been available to the public since then, banks like Citibank Bhd have revised the offered rates and the proportion of funds placed between FD and unit trust, probably in reaction to the low-interest rate environment and lethargic stock market this year.

The prudent investor should tot up the plusses and minuses of this product before investing his money. The main features of the FD-unit trust are set out below.

FD with unit trust attached
The main catch is that in order to qualify for the high rates, the investor needs to place funds with the bank’s unit trust fund in addition to the sum placed in FD. Most banks require that an equivalent sum be placed, so if you have RM10,000 on FD, you place RM10,000 in the bank’s unit trust fund at the same time. Citibank’s Centennial Celebration Promotion Plan 2 requires a 25:75 unit trust/FD ratio whilst RHB Bank’s SuperInvest allocates the funds at 60:40. Among the banks surveyed, minimum investments per FD ranged from RM5,000 to RM50,000.

The unit trust portion operates on the usual premises. This means investors should be prepared for the investment risks, including possible loss of the principal amount and fluctuations in the net asset value of the fund.

According to Charles Sik, vice-president of the investment and insurance department in consumer banking at Citibank, the return on the unit trust varies as it depends on the type of fund the investor selects. The investor therefore needs to determine his risk tolerance before selecting the investment portfolio that best suits how aggressive he wants to be in the market. While past performance is no indication of future performance, he should also analyse the track record of the fund to determine if it is the fund for him.

Another important point to note is that entry, management and trustee fees on the unit trusts can also eat into the FD returns. A quick look shows that entry fees can range between 4.0 and 7.0 per cent of the amount invested, management fees average 1.5 per cent pa and trustee fees are between 0.06 and 0.08 per cent pa of the value of the fund.

Gina (not her real name), a retail investor who did some rough calculations, is not taken in by the offer. “Looking at an FD-unit trust that offers you 8.88 per cent, if you take into account management fees of 1.5 per cent pa and trustee fees of 0.08 per cent pa, the returns are only 7.3 per cent pa, a figure which does not appear as marketable [as the original 8.88 per cent.],” she says.

What happens when the value of the unit trust portion falls below the amount placed on FD? Does the customer have to top it up to continue getting the high FD rates? Both Citibank and RHB Bank explain that once the investor meets the FD-unit trust proportion at his initial investment, he will not be required to top up the unit trust portion should there be any change in the investment value thereafter.

Withdrawal from the unit trust usually results in normal FD rates being applied on the deposit. Both RHB Bank and Citibank’s position is that the investor who withdraws his unit trust investment within six days of purchase will have his deposit rebooked at normal FD rates. A withdrawal after the six days, however, does not affect the high FD rates, though investors should note that they would have paid for their entry and management fees by that time anyway.

Reading the fine print reveals more salient features of this product. For one, the high rates offered are for a single tenure only. Once the duration of the FD is up, the returns revert to the usual board rates, which are currently hovering at 3.2 to 4.0 per cent pa for deposits of up to 12 months. Also, the figures advertised are usually the annualised rates so the investor may find himself enjoying as little as one-twelfth of the rate for as short as a month.

Lastly, the fine print also states that FD rates are subject to change without prior notice. According to RHB Bank, the advertised rate is locked in at the time the customer invests, regardless of what happens to the published rates during the tenure of the FD. Citibank’s Sik reassures us that Citibank’s advertised FD rate of 33 or 13 per cent pa for a one-month deposit (depending on which plan you opt for) is fixed for as long as the Citibank time deposit interest rate for a one-month tenure remains at 3.2 per cent pa.
So, at this stage of the article, we have established that this FD-unit trust product is not for the risk-shy who are merely shopping for best rates between FD accounts. The high FD rates are conditional on entry into the unit trust investments, and there is no assurance that the FD returns will be sufficient to offset any unit trust losses.

Unit trust with FD attached
There is another, kinder, way to view this picture. Turned on its head, it is a unit trust product with an attractive FD tagged on. If an investor already has unit trust investments or is looking to invest in them, then this may be a cost-efficient way of diversifying his portfolio and covering his unit trust costs at one go. One way of deciding would be to calculate the costs and returns of a separate, “normal” FD account and unit trust investment combo, and comparing it against that of a high-rate FD with unit trust attached.

Martha (not her real name), another retail investor, feels the returns are not high enough for her. In response to RHB Bank’s offer of 8.88 per cent pa for an eight-month fixed deposit, she says, “Assuming 8.88 per cent is the annualised return, what you will actually get at the end of eight months is about 5.9 per cent. The average upfront fee you pay for unit trusts is 5.0 per cent. Say the 5.0 per cent is returned to you, then the FD and equity investments will only need to make a return of another 0.9 per cent. Even assuming the 8.88 per cent is the actual return after eight months, if I can get between 2.5 and 2.8 per cent on an FD and pay 5.0 per cent for my unit trusts, I would expect more than 1.0 to 2.0 per cent returns on my equity investments.”

The current sluggish stock market may have something to do with the lower rates offered and the lower combined return on FD plus unit trust. When Citibank launched its “Centennial 100 per cent” product early this year, it offered a 100 per cent pa return on a one-month FD. The deposit was allocated with the unit trusts/FD ratio being 75:25. Sik says that the equity market was strong then and the response to the product was overwhelming. The same product now only offers a 33 per cent pa return on a 50:50 unit trust/FD ratio under Plan 1, and a 13 per cent pa return on a 25:75 unit trust/FD ratio under Plan 2.

Those who are looking to offset their unit trust costs with the FD gains will have to trade in some fund flexibility, and perhaps fund performance, in return. Ryan (not his real name), a retail investor, says this product is an attractive option if he had excess cash that he wanted to keep relatively liquid. He would, however, prefer to shop at banks that provided a selection of unit trust funds to choose from.

A sense of timing also comes in handy. Unit trusts are generally medium- to long-term investments, and FD returns are credited at the end of the tenure. So the investor may want to consider how best to match the duration and timing of the FD returns against that for unit trust fees and losses.

So, while the facts paint a less rosy picture than at first glance, there is a place for this product. However, that place is not among conservative fixed depositors, but among unit trust investors looking to fund the fees for their healthy risk appetite.