Term deposit, bonds or shares: how to increase savings more securely?

In September, Estonia’s Holm Bank conducted a survey among people who have savings in a current account or in cash to find out why they don’t grow their money using term deposits. In addition, the participants were asked which options they were most likely to consider in order to keep and increase their savings.

“Just over half of the respondents, or 52%, said they had considered opening a term deposit, but hadn’t done so for various reasons,” explained Holm Bank CEO Kaspar Kalvet. “A lot of people are afraid to lock in their savings, while others mentioned that they expect a higher return from investing their savings.”

The risky world of shares

Holm also asked about other investment options that people who have savings in a current account or in cash had considered. Investing in shares was the second most popular option after term deposits, with 48% of respondents having considered it. Men were more likely to have considered this higher-risk investment option, with 54% of male respondents having thought about diving into the world of shares. Female respondents displayed a slightly more conservative attitude, with 43% of them having considered investing in shares.

“It’s said that it’s only worth buying shares with money that a person is prepared to part with,” Kalvet noted. “That’s perhaps a bit too pessimistic, but it’s true that share prices are sensitive to the performance of the company itself and to equity market fluctuations. As such, shares shouldn’t be bought with money that a person needs in the short term, for example as a downpayment on a home or for other planned expenses.”

Term deposit – good insurance against inflation

Kalvet says that if a person has no previous exposure to the equity market, they should start growing their money using a more secure solution.

“We’ve just extended Holm’s term deposit offer until the end of October due to strong demand,” he revealed. “We offer the market’s highest interest rate on deposits – 4% – for all deposit terms, ranging from three months to five years. That rate is guaranteed, and it’s also enough to cover the impact of current and foreseeable inflation on savings. It’s worth remembering that bank term deposits are a completely risk-free investment: no matter what happens to the bank or the economy, a person is 100% certain to get their money back, because deposits opened in banks registered in Estonia are protected by the Guarantee Fund to the value of up to 100,000 euros.”

Lower-risk bonds

Those who want a slightly higher return than term deposits can provide – and are prepared to take a higher risk to achieve it – should consider investing in bonds.

“Just over one in five of the respondents in our survey had considered buying bonds,” Kalvet said. “The advantage of bonds is that although with them the money’s also locked in for a fixed term, they can be traded, so if a person needs the money for something else, they can sell the bonds. That said, trading can involve fees, and the selling price can change over time as well.”

Kalvet says it is worth remembering that only term deposits in banks are 100% guaranteed. Investing in bonds involves some risk. “If the issuing company went bankrupt, the claims of bondholders and other creditors would be satisfied before those of shareholders,” he explained. “But if the company’s financial situation was so dire that it didn’t have enough funds left over to cover the claims of its creditors, the money spent on the bonds would be lost.”

Home is no place for savings

Nearly a third of respondents had thought about placing their savings in a pension fund, while 6% stated that they had considered entrusting their money to a savings and loan association. However, 33% of those surveyed said they were happy keeping their money in a bank account or in cash, and were not considering any other way to increase their savings.

“Cash is without a doubt the least secure way of keeping savings, since not even home insurance covers the loss of cash at home due to theft, fire or other incidents,” Kalvet cautioned. “If a person doesn’t want to invest their money in any way, it should be kept in a bank account, not a desk drawer or under a mattress. And if the money is in a bank anyway, it might as well earn its owner a guaranteed income.”