Buying savings certificates for first time? Be aware of 5 mistakes

Savings certificates remain one of Bangladesh’s most popular investment options, particularly among middle-income and lower-income households seeking a relatively secure place to put their money.

For many families, returns from savings certificates provide an additional source of income, while the investment can also serve as a financial cushion for major expenses such as education, medical treatment and other emergencies.

However, poor investment planning can leave investors with lower-than-expected returns or even financial losses. 

Before purchasing savings certificates, investors should carefully consider the maturity period, their financial needs and the applicable profit and tax rules.

Here are five common mistakes to avoid:

Locking up emergency funds: Money that may be needed for emergencies or medical expenses should not be locked away for three to five years. Encashing a savings certificate before maturity can significantly reduce the returns.

If there is a possibility that you will need the money within a few months, it may be better to avoid investing that amount in savings certificates.

Failing to understand investment tiers: Once investment in savings certificates exceeds Tk 750,000, the applicable profit rate declines in stages.

Therefore, investors with larger amounts may consider distributing investments among eligible family members rather than putting the entire amount in one person’s name. However, such arrangements should comply with applicable tax and ownership rules.

Getting the tax-return requirements wrong: Under the applicable rules, a 15% withholding tax is deducted from profit if the investor does not provide a Taxpayer Identification Number (TIN). Where a valid TIN is provided, the withholding tax is 10 per cent.

Some investors purchase savings certificates without a TIN, resulting in a higher tax deduction and lower net returns.

Choosing the wrong scheme: Investors often buy a savings certificate without first considering when they actually need the returns.

Some schemes, such as the Family Savings Certificate available to eligible women, provide monthly returns, while other certificates offer returns at three-month intervals or according to different payment structures.

Before investing, determine whether you need the profit monthly, quarterly or at a longer interval, and choose the scheme accordingly.

Putting all your savings in one basket: Investing all of your future savings in a single instrument, including savings certificates, can expose you to unnecessary financial constraints.

A better approach is to build an investment plan covering short-, medium- and long-term needs, while allocating money according to when it is likely to be required.

The key is to match the investment scheme and maturity period with your financial goals rather than buying savings certificates simply because they are considered a safe investment.