The base interest rate has fallen to the 2% range for the first time in 2 years and 4 months, igniting concern among financial consumers who have been managing their money primarily through bank deposits. Just a year ago, they could expect an annual revenue of around 4% when signing up for deposits, but now anticipated revenue has dropped by about half.
If the Bank of Korea implements an additional interest rate cut one to two times this year, the deposit interest rate will drop to the low 2% range. Experts advise that to achieve annual revenue of 4% to 6%, it is necessary to pay attention to alternative investment products, such as U.S. Government Bonds, bond funds, and equity-linked derivative bonds (ELB).
◇ Investments in U.S. Government Bonds and other bonds become popular
The most recommended investment by experts is bond investment. Kim Dae-soo, head of the ICC team at Shinhan Bank's Wealth Management Division, noted, "The U.S. base interest rate is higher than Korea's at 4.25% to 4.50%, leading to higher yields on U.S. Government Bonds. If the U.S. lowers the base interest rate by the end of this year, previously purchased bonds could yield an annual revenue of up to 6%. Now is an opportune time to invest in U.S. Government Bonds."
When the base interest rate falls, the rates on newly issued bonds decrease, and the appeal of existing bonds with higher rates increases, raising their prices. Therefore, if the U.S. lowers its base interest rate, the prices of existing bonds will rise, allowing for higher anticipated revenue. Choi Jeong-yeon, deputy center head at KB Kookmin Bank's Gangnam PB Center, stated, "If the U.S. lowers the base interest rate by 0.5 percentage points, statistics suggest that one could expect a 10% revenue over one year, excluding exchange rates." She added, "If the U.S. lowers the base interest rate by 0.25 percentage points by the end of this year, it could yield 5% to 6% revenue."
If investing in individual bonds is challenging, bond funds could be an alternative. Bond funds combine high-quality bonds with high-yield bonds to increase revenue while enabling risk hedging. Kim Dae-soo remarked, "Among domestic corporate bonds, high-quality bonds are at about a 4% interest rate. Achieving a 5% to 6% revenue by investing in a single bond is not easy, so considering a bond fund might be worthwhile." The revenue of the corporate bond public fund 'Korea Investment Credit Focus Fund' last year was in the 6% range.
◇ ELBs with no risk of principal loss are also an alternative
Several experts recommend ELBs, which provide principal protection while offering the potential for higher revenue than deposit interest. This is a different product from equity-linked securities (ELS) that faced controversy last year due to large principal losses. While indices or individual securities may be the objects of investment just like ELS, only the revenue excluding the principal will follow the prices of the underlying assets. Most of the investment assets can produce stable revenue, comprising primarily of government bonds, while some are riskier assets.
Choi Jeong-yeon, the deputy center head, mentioned, "ELBs do not carry the same risk as ELS. As long as the issuer does not go bankrupt, the principal is guaranteed, and at the same time, it can generate 1% to 2% points higher revenue than bank deposit interest." She continued, "Currently, the revenue of ELBs is in the range of 4% to 5%." Moreover, she stated, "They are mid-risk, mid-revenue products that can be invested in while observing market conditions since early redemption is possible every six months."
For investors seeking safety, finding 'last train' deposits with preferential rates yielding around 3% may also be a method. Deputy center head Choi Jeong-yeon mentioned, "There are still deposits in the 3% range among special sale products from banks and savings banks," adding, "For investors who want principal protection, these deposits at the 3% level are still worth considering." However, she advised investing in products with longer maturities as interest rates for new deposit products are likely to fall further over time. Park Tae-hyung, head of the TCE Signature Center branch at Woori Bank, mentioned, "Currently, short-term products with maturities of 3 or 6 months have higher rates than 1-year products, but if the Bank of Korea implements an additional two interest rate cuts, joining longer-term deposits would be advantageous."
Conversely, when taking out a loan, one should opt for shorter maturities and choose variable interest rates that change periodically. Current fixed rates are around 0.5 percentage points lower than variable rates, but interest rates are expected to decrease over the next 1 to 2 years. If there's an immediate need to reduce interest costs, selecting fixed (mixed) or periodic rates may be an alternative.