Do you want to grow your money quickly and safely?
You do, of course, stupid question!
Putting your money in a conventional savings account won’t be adequate if you want to stake it on something significantly safer than cryptocurrencies, launching a business, or the stock market.
After all, the rate of inflation would eventually surpass the interest rate you would earn there.
Your portfolio can have extra security thanks to a Long-Term Negotiable Certificate of Deposit (such a mouthful; let’s just stay with LTNCD for now). It nevertheless merits consideration even though the rewards aren’t astounding.
This less well-known investment product has been offered by banks in the Philippines since 2014 with an annual interest rate ranging from around 3.75% to 5.375%.
What is it then? Is buying LTNCDs in the Philippines a smart move? How can one be purchased? Will it be sufficient to produce passive income?
We’ll teach you everything you need to know about it in this manual.
Describe LTNCD
For investors looking for a secure investment choice, banks may issue LTNCDs or Long-Term Negotiable Certificates of Deposit. In comparison to short-term time deposits and conventional savings accounts, it offers more competitive interest rates.
LTNCDs are required by the Bangko Sentral ng Pilipinas to be denominated in Philippine pesos and to maturity in at least five years.
In addition to being registered with a third-party Registry Bank that maintains an Electronic Registry Book, an LTNCDs must also be scripless in form.
Features of an LTNCD
Let’s dissect the acronym to better grasp what an LTNCD is by going over each word in turn.
- It is Long-term
- It is Negotiable
- Certificate of Deposit
- It is a bank deposit product
Other features of LTNCDs:
- Banks typically give an offer period for LTNCDs (the issuer).
- Depending on the issuer, this investment instrument often has a minimum investment/required beginning capital of Php50,000 or higher.
- You can increase the amount in your LTNCDs. The issuer determines the increments. This typically ranges from 10,000 to 100,000 Philippine Pesos.
Work of LTNCDs
LTNCDs are a straightforward concept, despite how difficult their name may sound. Simple math will allow you to calculate your expected income with ease.
However, you must first consider your capital, the interest rate, the interest term supplied by the issuer, and the LTNCD’s maturity.
Take the BPI LTNCD due in 2025 (5 12 years tenor), for instance.
It has a fixed interest rate of 4% per year beginning on the issue date and extending through it (October 25, 2019). In particular, the interest will be paid on January 25, April 25, July 25, and October 25 of each year (except April 25, 2025 – maturity date). Negotiations/transfers must be carried out via PDEx.
This LTNCD, valued Php3.1 billion, will be issued in scripless form in denominations of P1 million and integral multiples of P100,000.
Let’s assume that you fund this LTNCD with the required minimum of P1 million. The calculation will be as follows:
Quarterly Interest:
- Capital x (Interest divided by the annual payout frequency)
- Consequently, 10,000 x (4% / 4) = 1,000,000
Overall Interest
- Total payouts multiplied by the quarterly interest rate
- 10,000 times (4 payouts over 5 1/2 years) is 220,000
Gain:
220,000 / 1,000,000 = 22%
According to the calculations above, if you invested P1 million in the aforementioned BPI LTNCD, you would have gained P220,000 or 22%.
LTNCDs versus Time deposits
You might be asking how an LTNCD differs from a time deposit now that you are aware of what it is.
Time deposits have maturities ranging from a month to several years. It is not transferable during that time, and early termination will result in a substantial penalty.
LTNCDs, on the other hand, can be sold on the secondary market but cannot be pre-terminated.
Investment in LTNCDs in the Philippines: Pros and Cons
Want to find out if LTNCDs are right for you? See below for a list of its benefits and drawbacks.
Benefits
High output
LTNCDs offer a greater annual interest rate than time deposits, and if you hold one until it matures, the interest rate is guaranteed. Additionally, it is secure due to the PDIC’s insurance coverage of up to P500,000 per depositor.
Negotiable
One of the main appeals of LTNCDs maybe this. In comparison to traditional time deposits, it offers better liquidity because it can be sold to the secondary market before it matures.
The potential for passive income
You can generate a consistent cash flow every quarter if you invest a sizeable sum in your LTNCD.
A waiver of taxes
If someone buys an LTNCD on the primary market and keeps it for at least five years, they are eligible for a tax break.
Simply required
Investors must submit specific documentation to banks in order to purchase an LTNCD.
To comply with local anti-money laundering regulations, this typically contains their Tax Identification Number (TIN) in addition to other prerequisites.
Affordable
Some LTNCDs only have a Php50,000 minimum requirement, with the opportunity to increase it in Php10,000 increments after that.
If you have spare cash, instead of letting it sit in your standard savings account, think about investing it in an LTNCD.
Drawbacks
Maturation takes a lengthy time.
LTNCDs must be kept for at least five years if you wish to benefit the most from them. You can still sell it, but there will be costs, taxes, and fees.
To pay withholding tax is necessary.
In five years, you never know what will occur. You must sell your LTNCD before it matures if you need the money in it.
You will be taxed between 5% and 20% on any interest you generate as a result.
Variable interest
The interest in LTNCDs has been constant throughout.
Contrary to time deposits, where you might benefit from higher interest based on the maturity length, there is no incremental or graded interest rate. There won’t be a chance for you to increase your income as a result.
It’s difficult to buy or sell in the secondary market.
Even though LTNCDs can be sold on the secondary market, the procedure might take a while. There will be a ton of paperwork involved.
Limited time offer
You must purchase an LTNCD within the offer time if you want to. Once this has passed, the only option to purchase one is on the secondary market.
Be prepared to pay expensive fees and levies that can significantly reduce your gain.
