Comparing returns: Retail bonds vs bank deposits

If, like many investors who are risk-averse, you have low income, your saving options can include parking your funds in the bank because they offer a promise on the principal amount as well as some sure returns. While they are definitely one of the safest options, these instruments may offer low returns on your money. 

So, you may want to think lottery-style savings schemes, which combine the safety of a bank account with an added incentive: a chance to win a large prize. Such schemes have cropped up in the UAE, but critics pounce on the lack of solid guarantees for high returns. 

The question is: would you rather let your money sit idly by while you wait to win Dh1 million or put it in a savings scheme that guarantees you a fixed return every year? 

Banking and finance experts cannot seem to agree on the answer. In the last three years, the average interest rate on fixed deposit at HSBC was around 4 %, with the highest rate reaching 5.75 % in 2008. This year, the highest rate so far has been 3.5 %.

For James Pearson, the bank's head of assets and liabilities, savers are better off placing their funds in high-yielding fixed deposits or flexible savings accounts such as their eSaver, which currently offers three per cent return per year. 

"Broadly, lottery-based savings products offer minimal or no return, as a trade-off for a chance to win a bumper prize," says Pearson. 

Returns 

Mohammad Qasim Al Ali, chief executive officer at National Bonds Corporation, disagrees. He says it is very rare to find high returns in either savings accounts or fixed deposit accounts these days. 

The market average rate in 2010 was only 0.46 % for saving accounts and 2.88 % on 12-month fixed deposit accounts. National Bonds, on the other hand, distributed a 3.78 % profit rate last year. In the last three years, annual dividends averaged 4.79 %, with the highest rate recorded at 7.07 % in 2008. 

"If we compare National Bonds to either of these products, it still comes out on top." He says their product doesn't only provide higher returns and multiple chances to win huge prizes, they also offer free life Takaful cover (Sharia-compliant insurance) and the bondholder is not required to pay any fees or charges such as entry, service, management, account statement, minimum balance or exit fees.