Simple and structured term deposits.  Do you know what they are?

Simple and structured term deposits. Do you know what they are?

Creating simple or structured term deposits is the preferred solution for many Portuguese people to apply their savings.

In fact, have your money stoppedthat is, without yielding, whether it is in a drawer or a current account, means to be losing money every day. And if this is true when inflation is low, imagine what happens with a high inflation rate. You are losing purchasing power every day.

Let’s look at an example: imagine that you have 100 euros at home, aside, to buy the table you need, but you postpone the purchase until the following year, because the one you have still lasts a little longer. But if this year’s inflation rate is 8%, next year the table will cost 108 euros, so with the money you have you won’t be able to buy the table anymore. Ie, your money has lost value.

The solution is then not to have your moneyro stopped. That is, invest your money, ideally in a financial product with a rate identical to the rate of inflation.

Constituting a term deposit can be a solution to obtain some return, but do you know for sure what a term deposit is? Do you know the associated risks? And if the bank offers you a structured term deposit, do you know what they’re talking about? That is, what distinguishes a simple term deposit from a structured term deposit?

In this article we will try to clarify some questions you may have.

Also read: AforroNet: the platform for state savings products

What is a term deposit?

A term deposit implies apply a certain amount for a fixed period (one year for example) during which you cannot freely move your funds.

For having committed to keeping the money still, the financial institution will pay you a fee.

There are two main types of term deposits: simple and structured term deposits.

What simple term deposits and structured term deposits have in common

Both deposits have guaranteed capital, that is, at the end of the term, you receive the amount you deposited. And both are under one guarantee system that protects deposits in the event of insolvency of the financial institution, up to the established limits.

The system that protects deposits depends on the financial institution where the deposit was made. If you make your deposit at an institution based in Portugal, your money is protected by the Portuguese Deposit Guarantee Fund (FGD), regulated by the General Regime for Credit Institutions and Financial Companies (RGICSF). But if the deposit is made in a branch in Portugal of foreign credit institutions, the deposit guarantee can be given by another system. Learn more here.

Note that the Deposit Guarantee Fund guarantees 100,000 euros per holder and entity. However, in the event of insolvency, only the capital invested in the deposit is guaranteed, not the return that could be obtained.

What distinguishes simple term deposits from structured term deposits

They differ essentially in remuneration. In simple deposits, the remuneration is calculated from an interest rate, which can be fixed or variable. That is, on the due date of the deposit, you will receive the deposited amount plus interest.

But in structured deposits, the remuneration depends on other factors, and may be very high or not remunerated. They are therefore more risky for the depositor.

Simple term deposits

It’s a financial product without risk. The customer constitutes the deposit and, within the agreed period, receives the principal and interest. It’s an application simple and safe, ideal to monetize your savings. But, as it has no associated risk, its profitability is usually low, and may not compensate for the rise in interest rates.

As you know the interest rate from the beginning, you can easily calculate the amount of interest you will receive. But don’t forget that, on interest, you will have to pay the IRS at the 28% release rate. So, do not do the math with the Nominal Annual Rate (TAN), use the Annual Net Nominal Rate (TANL), which the tax rate is already deducted.

Before making the deposit, carefully read the conditions. To do this, carefully analyze the two documents that the financial institution will have to deliver to you before making the deposit (and which must be available on their website).

Standardized Information Sheet

A Standardized Information Sheet contains all the information you need to know about the product where you will invest your money. As it is standardized, that is, identical for all financial institutions, you can easily compare the various options.

Therefore, you should carefully read the document before making the deposit and try to understand:

  • What are the conditions for accessing the term deposit (for example, if it is for new customers, for new amounts, or simply for any customer);
  • The minimum or maximum amount of incorporation;
  • The minimum deposit maintenance amount, if any;
  • How can you move the funds;
  • The deposit term;
  • Whether there is a possibility of mobilizing the funds in advance. If possible, what penalties should be applied. If it cannot be mobilized in advance, it must expressly contain this indication;
  • Whether or not it is renewable at maturity, and if so for what period;
  • Interest rate;
  • Interest: method of calculating interest, dates and method of payment of interest (namely, by crediting another account, or capitalization);
  • What is the guarantee system that protects the deposited amount;
  • Validity period of the conditions presented in the FIN, if applicable.

Depositor Information Form (FID)

You will also be given this document which contains information regarding the guarantee system that protects deposits made with the credit institution as collateralsa. It identifies the limit of this protection, as well as the period for repayment of deposits in the event of the institution’s insolvency.

All deposit holders will have to sign the FIDs. And this must be available on the financial institution’s website.

Also read: Are Savings Certificates a good option again?

Structured term deposits

Structured term deposits are term deposits whose remuneration is associated, in whole or in part, with the evolution of other financial instruments such as, for example, the value of a basket of shares (it can be the value of a single share, but it is not very common), a stock index or the evolution of exchange rates.

For the most part they cannot be mobilized in advance as the remuneration is only calculated at the end of the term.

Note that we are talking about remuneration and not interest, since, as mentioned, remuneration is not calculated according to a contractual interest rate, in which case interest is actually paid.

How are riskier financial products offer the possibility of having a higher remuneration than the simple term deposit. But there is the other side of the coin: may not have any remuneration.

Precautions to be taken before contracting a structured term deposit

Before making a simple term deposit, you will be given a Standardized Information Sheet (FIN) with the conditions of your deposit. If you opt for a structured deposit, you will be given another document called Fundamental Information Document (DIF).

And if, before setting up a simple term deposit, it is important that you read the FIN carefully, all the more reason you will need to read the DIF if you are considering setting up a structured term deposit.

Fundamental Information Document (DIF)

So when reading the DIF try to know:

  • What does the deposit remuneration depend on?
  • How remuneration is calculated
  • Whether or not there is a guaranteed minimum wage
  • Possible compensation scenarios: favorable, moderate, unfavorable and stress
  • The risks that are associated with the deposit and which can be: market risk, foreign exchange risk or credit risk
  • Whether or not it is subject to early mobilization (in most deposits it is not). In case of being mobilized, what is the penalty
  • the deposit term

In addition, the financial institution will also have to give you the Information Form for the Depositor (FID), similar to the simple term deposit.

Also read: 5 safe investments to invest your money

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