An asset manager offered this interesting perspective. When you put your money in the bank, you do not own the assets of the bank. The bank just give you a fixed deposit certificate or a monthly statement, i.e. just a piece of paper. If the bank gets into financial difficulty, you may lose all of your money. Your protection is up to the amount of the deposit insurance scheme or government guarantee.
During the financial crisis in USA, many large banks were on the verge of collapse. If the government did not step in to bail out the banks, many people would have lost their savings in the failed banks.
He told me that it is safer to invest in shares as the investor directly owns a share of the invested company. A unit trust allows diversification into many companies, with the assets held by the trustee company (and not the fund manager).
My friend, who worked several years in Vietnam, told me that the banks offered high interest rate, but the people were afraid to put their savings in the bank, as they were afraid of bank failure. They invested in other assets, such as life insurance, property and gold. But they avoided the banks.
Singapore banks now enjoy full government guarantee on their deposits, but this guarantee will expire soon. After that, the money will be exposed to the same risk faced by banks elsewhere. Although the local banks have high credit rating, the deposits are still exposed to the underlying risk
People who put their money in the bank should look for a higher interest rate that is much higher than the 0.5% paid by the bank. If not, it is better to invest in a low cost investment fund, and manage the risk through diversification and long term investing.
Tan Kin Lian
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03/21 - 03/28
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