Unit Trusts vs Fixed Deposits

When you want to invest a lump sum amount for a short term, fixed deposit is an ideal financial product to consider. The tenure for a fixed deposit account ranges between one year and five years. Fixed deposits are also known as term deposits and time deposits. In fixed deposit, the longer your tenure is, the higher is the rate of interest you earn.

In a term deposit, you cannot withdraw money unless the tenure has been completed. However, in case you withdraw before the maturity period, you will be subjected to penalties. Also, with an early withdrawal you will end up losing the interest rate.

On the other hand, when you invest in a unit trust, a professional fund manager manages your investment. Since fund managers have in-depth knowledge regarding the stock market, your money will be invested in the most appropriate manner.

There is no fixed term for a unit trust. However, since the stock market is not predictable and often fluctuates, it is recommended to invest in a unit trust for more than five years.

Comparison between unit trust and fixed deposits

A basic comparison between fixed deposits and unit trusts is outlined below:

  1. Gains
  2. In a term deposit your returns are assured. When you invest a lump sum amount in a fixed deposit account, you have the guarantee that you can accomplish your financial needs in the future. The rates of interest, however, are not very high, and your final profits may only be nominal.

    In a unit trust your returns are not assured. Your returns from a unit trust completely depend on the stock market and the allocation of your funds or assets. However, the rate at which you earn profits may be higher depending on what kind of funds you have chosen.

  3. Charges
  4. The different types of fees charged under fixed deposit include:

    • A minimum balance amount needs to be maintained.
    • Charges are applicable when you want to withdraw your deposit amount before the maturity period.

    The different types of fees charged by a unit trust include:

    • Subscription fee
    • Redemption fee
    • Management fee

  5. Accessibility
  6. If you decide to withdraw the fixed deposit before the maturity, you are entitled to pay penalties. With a low interest earning ratio, it does not make sense to make early withdrawals and pay the required charges to the bank.

    Unit trusts also charge redemption fees when you want to redeem or sell the funds. But with a higher earning ratio, you might be able to afford the fees.

  7. Safety
  8. Irrespective of the market condition, your investment in a fixed deposit is safe and secure. For a term deposit, the degree of capital protection is high. The government covers up to S$50,000 per person in fixed deposit accounts under the Deposit Insurance Scheme.

    On the other hand, a unit trust does not provide you with any kind of a capital protection. Only with appropriate allocation of assets can security be assured.

    Both fixed deposits and unit trusts have their pros and cons. It is always better to go for an investment that suits your specific financial needs.

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