Q1: Should You Invest Heavily in 1-Year Maturity Products with High Interest Rates?
With 1-year maturity products currently offering the highest interest rates, the question arises if it's wise to invest heavily in them. Experts suggest maintaining a 7:3 ratio between long-term and short-term investments. They recommend dividing funds into 70% for long-term (2 years or more) and 30% for short-term (1 year or less).
The emphasis on long-term investments is due to the uncertainty of high interest rates remaining after 1 year. Despite the competitive deposit interest rates from major banks remaining in the 4% range, the anticipation of a potential increase in the central bank's base rate might elevate 1-year deposit rates, albeit temporarily. However, experts caution that this high rate might not continue beyond the first year, making long-term investments more advantageous in the long run.
For those hesitant about tying up their funds for extended periods, the option of using a 'parking account' is available. Savings and internet banks have introduced parking accounts with interest rates exceeding 5%. However, these rates are also expected to decrease soon. Thus, financial decisions should be based on individual circumstances, and a contingency fund for emergencies is ideal in a parking account.
Q2: Are High-Interest Savings Banks Trustworthy?
While savings banks offer higher interest rates than commercial banks, concerns regarding their stability persist. Yet, savings banks are protected by deposit protection up to ₩50 million (~$42,000), making them secure for modest deposits.
Savings banks often have higher interest rates due to looser lending requirements compared to commercial banks. However, this could lead to riskier lending practices, potentially impacting depositors' returns. It's crucial to ascertain the stability of financial institutions before investing, considering their categorization into three tiers: primary, secondary, and tertiary financial sectors.
The stability varies among these sectors, so confirming the affiliation of a financial institution is essential. Savings protection systems ensure that depositors are covered by the Deposit Insurance Corporation up to ₩50 million. This coverage depends on the depositor's relationship with the bank, not the total amount deposited, meaning multiple deposits within the same institution remain protected up to ₩50 million.
Understanding the coverage of the deposit protection system is critical before opening an account, as certain products might not be covered. Before making any financial decisions, it's important to verify whether deposit protection applies to the chosen product. In conclusion, striking a balance between professional recommendations and individual financial situations is key, safeguarding funds while considering future needs.