Fixed-term investments are those products which, as their name suggests, have a set term, or time period in which you have to leave your money in. In return, you’ll earn an already-specified amount through interest or coupons payments.
Such investments are usually either debt instruments such as bills, notes, or bonds (differentiated by the term of the instrument), or deposit instruments such as a time deposit or Long Term Negotiable Certificate of Deposit (LTNCD).
If you feel that fixed-term investments should have a place in your portfolio, here are a few questions to ask yourself before you considering investing in one. The answers will increase your chances of having a good experience with these products.
How long you can stay invested?
Since the fixed term is central to such products, knowing how long you can be without your money is crucial to having a rewarding experience. That’s because it allows you to predict how much you’ll earn and when the returns will come in, so you can already make plans for them.
In the case of a time deposit, you’ll be able to pre-terminate the investment in case you suddenly need money and have no other source. However, this will affect the amount of profit that you get.
For other types, you may be able to sell them in the secondary market. Note that there’s no guarantee that you’ll get the equivalent value of your investment, and you’ll also stop receiving returns once you’ve sold them.
Either way, you’d probably be better off staying invested for the full term, and deciding what to do with the principal (original money invested) and returns after, especially if your investment does not have a rollover option.
How much do you want to earn?
This helps you narrow down the fixed-term products that you can pick from. In general, the longer you can stay invested, the more you can potentially earn. This is the trade-off for keeping your money in for a longer amount of time.
Of course, you’ll need to make sure this matches the answer to the previous question. If the amount that you want to earn means you’ll have to keep your money in for longer than acceptable, you’ll have to see if you’re willing to compromise on the amount or the time.
If neither factor is negotiable, you may find that such products aren’t a good fit for you. If that’s the case, you can explore investments which can grow quicker (although you should keep both diversification and your risk profile in mind).
What will you do on maturity?
Once the term of these products ends, you’ll stop receiving coupon payments and get your money back in cash. At that point, it would be better for you to already know what you’ll do with both the principal and the profit.
If you don’t have an immediate need for either, you can choose to put both in another investment. Don’t forget though that you may not get the same interest rate even if you choose to put it in the same fixed-term product. This is what we call ‘Reinvestment Risk’.
Still, if you’re allocating that portion of your portfolio to such investments, you can still consider such products even if they’ll earn you less than the ones you have now.
