Updated: February 24, 2020
Many commercial banks offer high-yield savings accounts. These are cash deposit products that provide higher interest rates than normal savings.
If you can afford their minimum maintaining balance and other requirements, then you’ll get to enjoy better interest rates and earn more from having the usual savings deposit.
On the other hand, time deposits offer a better alternative to high-yield savings accounts because they have much higher interest rates.
But of course, your money is frozen for the time being and you may incur fees if you cannot complete your term.
Meanwhile, another option to time deposits are conservative unit investment trust funds, which are also available in most commercial banks.
With UITFs, your money has the potential to earn as much as a time deposit, while maintaining enough liquidity that allows you to redeem and withdraw your cash anytime.
Now, given the choice to invest P100,000 – which among the three would you choose, a high-yield savings account, a time deposit product or a conservative UITF?
The table above shows the performance of the three instruments, from January 2008 (Year 0) until December 2011 (Year 4).
This comparative information came from a friend who works for a bank. In it, he used the historical data for their bank’s products.
From personal calculations and estimations, it looks like the high-yield savings account was earning around 2% per annum; the time deposit at around 3% per annum; and the UITF is invested in the money market and other fixed-income instruments.
By initial impression, it looks like the time deposit performed better than the three after four years. Thanks to the power of compound interest.
However, you should note that in previous years, the UITF actually earned more; and it was just in the final year when the time deposit overtook its earnings.
Will the time deposit continue to earn higher than the UITF from now on? There is no sure answer but personally, I’d say most likely.
But going back to the original question, if you have P100,000 today and would like to invest it in either of the three, which one is the best choice?
The answer depends in your investment objective. This criteria is often the most ignored factor when investing – that is to have a specific answer to the question: “What will the invested money be used for?”
Choosing The High-Yield Savings
If the money is part of your emergency fund, then you cannot afford to lose any of it. Additionally, it needs to be liquid so you can withdraw your cash anytime.
I would say that a high-yield savings account is a near-cash investment. And it is one of the best places to put money for financial emergencies.
Choosing The Time Deposit Account
If you’re saving up for something and you cannot afford to lose any of the money, then the time deposit is your best choice.
One good example is if you’re saving up some capital for your business. A time deposit will prevent you from taking money out of it unnecessarily, while still earning good interest.
Choosing The Conservative UITF
If the money is purely extra cash and you want to balance your portfolio with conservative investments, then the UITF is your best choice.
Your money in a UITF is not insured, it could go down, and earnings are not guaranteed. While conservative UITF’s rarely lose money, it can still happen, after all it is a low risk investment.
However, the flexibility to redeem and withdraw anytime is its biggest advantage because it allows you to move the money out if ever a better investment opportunity comes your way.
There is no real answer to which of the three is the best choice. Several banks nowadays actually offer products which inherit a combination of features from these three.
Some people, like myself, choose to invest in all three, because that gives me the most flexibility when it comes to my money.
Lastly, if you’re investment objective is long term, such as building a retirement fund. Then it’s usually better to put your money in a higher-risk instruments such as equity funds or the stock market because it will earn more in there.