Fixed-term deposits

I prefer to keep my savings on deposit and tend to tie them up on separate one-, two- and three-year fixed-rate terms. The reason being that I like to know exactly what rate of interest I will receive and that there will be no shocks at the end of the period invested. I have deposits maturing shortly in dollars and sterling. Should I renew these and lock them away for one or more years, or are interest rates likely to increase?

US dollar and sterling interest rates have been falling now for a number of years but the trend may be reversing in 2004 if the economists are right. With interest rates on both currencies at such a low point, it has only been natural for investors to switch to bonds/fixed interest securities in search of a higher fixed return.

If however interest rates do rise this year then tying up one's capital in fixed bank deposits may be the wrong thing to do, especially if base rates were to rise by the expected 0.5-0.75% that many are predicting.

For example, a one-year fixed deposit may currently pay annual interest of 4% in sterling. If however the Bank of England were to raise interest rates to 4.25% by the summer, then you would have lost out by tying up your capital on the one-year deal. It therefore depends on whether you believe interest rates will rise, if so by when, and by how much.

I would not recommend you tie up too much capital in a fixed- rate bond that has a maturity date of more than one year. You should instead consider having an account that tracks the base rate of the currency you hold.

The interest rate will fluctuate and mirror the Bank of England rate (in the case of sterling). It will rise and fall in line with changes to the base rate. If interest rates do increase in the future, you would enjoy the higher rate and not be tied in with a low fixed-rate account.

Although you appear to be a cautious investor, I would suggest you look at other alternatives to fixed deposits and cash. It is never wise to hold too much in cash, especially over the longer term.

If you are prepared to lock away a proportion of your capital for five years or more, then I would recommend you consider some form of stock market-linked investment with a capital guarantee or protection.

This should of course be only for a proportion of your overall wealth and the amount invested will depend on personal circumstances and requirements. The concept should however not be ignored.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com.

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Malta exchange control regulations must be observed. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.