Monday, December 6, 2010

Answers for Thursdee, Part 2: BPI Family's Plan Ahead Time Deposit, T-Bills, and Bonds


As promised, here are my answers to the rest of Thursdee's questions.

2. We were supposed to place 100,000 pesos in BPI Family's Plan Ahead account. Have you heard of this? It indicated 4.5% monthly income but the money would be locked for 5 years. Is this a good investment?

BPI Family's Plan Ahead account is basically a five-year time deposit product that is also offered by other banks, albeit at different interest rates. Five-year time deposits are attractive to some investors because interest income from these accounts are tax-free (the 20% tax is waived by law); of course, the caveat is that you won't be able to use your money for five years, which is a considerable amount of time to give up access to capital for most people.

We see the following details about the product from BPI's website:

Now we see why you thought this investment would provide a "monthly income" of 4.5%, or 54% per year, a figure that's closer to what loan sharks charge than what actually exists in "formal" markets; 4.5% is actually a yearly and not a monthly rate. The label "monthly" just means interest will be paid to you every month, amounting to 0.375% of your investment, instead of every year. 

This practice of misleading depositors, inadvertently or not, actually borders on being unethical, not just for BPI but other banks as well; I just say "borders" because because the bank actually does say in its website that the rate is an annual rate, although in a not-so-obvious way.

That being said, it does not necessarily mean that Plan Ahead is a bad product. But try to shop around for better rates from other, similarly reputable banks. Or if you have no qualms about investing in rural banks and are willing to completely place your trust in the Philippine Deposit Insurance Corporation (which insures bank deposits of up to 500 thousand pesos), they you may consider investing in these five-year deposits, most of which feature rates that are twice as high as that offered by BPI and other commercial banks.

3. Can you tell me more about Treasury bills and bonds? Is it really risk-free. I read also from one of the websites I came about during my "research" that it provides higher yield than time deposit accounts. Should we invest our 100,000 here instead of BPI's five-year time deposit?

Treasury bills or T-bills are short-term (one year or less) debt instruments offered by the government to investors; it basically represents what the government borrows from the investing public. Treasury securities (including Treasury bonds which are long-term) are considered "risk-free" only in the sense that it's impossible for the government to not be able to pay what it owes; as a last resort, the government can always just print money to pay off its debt, but of course while devaluing the currency at the same time. So strictly, treasuries are not really completely risk free since what investors earn can actually lose purchasing power, most likely from inflation. Still, since they are regarded as safe investments, they offer the lowest possible returns among available investment instruments (remember the high risk, high return rule).

A bond is just a generic type of long-term debt instrument that is sold by the government (Treasury bonds) or corporations (corporate bonds). Corporate bonds are riskier than government securities because it's entirely possible for corporate issuers to default on their debt (since they don't have an option to print their own money), and thus provide higher returns than Treasury securities. The last time I checked, annual returns on corporate bonds are in the range of 5 to 6% per year, after tax.

Both T-bills and bonds are sold by most banks and other brokers, albeit at higher minimum required investment amounts than other investment instruments. But there are alternatives for retail investors like you and I. If you want a safe investment similar to T-bills, you can always just invest in a time deposit account, or even a money market fund (mutual or UITF) so you won't sacrifice liquidity (meaning you can always sell your holdings at no or low cost). If you're comfortable with the additional risk of bonds (which significantly less than what you'll get from investing in stocks), then you can just invest in bond funds.

I hope you're satisfied with my answers to your questions, Thursdee. Happy investing and good luck. :)

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