[Practical Finance] Where Is the Safe Haven in the Unknown 'Zero Interest Rate Era'?

Global Economic Stimulus Efforts Amid COVID-19 Pandemic

Prolonged Ultra-Low Interest Rates Due to Monetary Easing
Commercial Banks Expected to Lower Deposit and Loan Rates

Preference for Short-Term Products Over Long-Term
Focus on Stable Principal-Guaranteed Products

Alternative Investments Like Real Estate REITs and ETFs
Aiming for Moderate Risk and Above-Average Returns

[Asia Economy Reporter Oh Hyung-gil] A path never taken before has opened. The COVID-19 pandemic has ushered in the world's first 'zero interest rate era.' As countries worldwide responded with monetary easing to stimulate their economies, South Korea also jumped on the bandwagon. Like the persistent COVID-19, ultra-low interest rates have prolonged, pushing the already bleak financial investment clock down to 'zero (0)'.

Stock prices have plummeted, and exchange rates are fluctuating wildly. Following the base rate cut, commercial banks are expected to soon lower deposit and loan interest rates. The time when you have to pay fees instead of earning interest by depositing money in banks is approaching. Minimizing losses rather than expecting profits is becoming crucial. Experts point out that it is necessary to quickly establish financial strategies suited to the zero interest rate era. The sooner you prepare, the better you can overcome the rough waves brought by zero interest rates.

◆ Use Deposit and Loan Interest Rates Smartly = Banks typically lower deposit interest rates within two weeks after a base rate cut. The Bank of Korea's emergency Monetary Policy Committee set the base rate at 0.75%, down 0.5 percentage points, on the 16th. Banks are expected to lower deposit rates by the last week of this month at the earliest or early next month at the latest.

Banks have already lowered rates on some products once. At the beginning of this month, Hana Bank reduced interest rates on 22 deposit and savings products by up to 0.45 percentage points. For example, the basic interest rate of Hana OneQ time deposit (1-year maturity) was adjusted from 1.35% to 1.10%, and the N Plus time deposit (1-year maturity) from 1.50% to 1.25%.

Shinhan Bank also lowered the preferential interest rates on its main transaction Future Planning Account and main transaction S20 Account from a maximum of 1.50% per annum to 1.25% starting the 21st. The basic interest rate on savings deposits was adjusted from 0.20% to 0.10% per annum.

Woori Bank lowered the WON deposit interest rates from 0.50-0.95% to 0.50-0.87%, and the Wibee time deposit rate from 1.40% to 1.10%. KB Kookmin Bank also cut the interest rates on the Kookmin Super Time Deposit unit period rate-linked type (1-6 months) from 0.70-1.10% to 0.60-1.00%.

Although interest rates have dropped, if you want stable investments, it is better to allocate more assets to principal-guaranteed products like deposits and savings. Holding cash and investing when a definite opportunity arises is also an important financial strategy.

If you inevitably need to use loans, it is advisable to utilize mobile unsecured loans that banks have recently expanded. Interest rates are around 3% per annum, offering low rates by reducing costs through non-face-to-face processes.

You should also actively use methods to lower existing loan interest rates, such as the right to request a rate cut. When your credit status improves due to employment, promotion, or increased assets, you can request a reduction in your existing loan interest rates. This can be done without visiting the bank, through mobile/internet banking or call centers.

◆ Attention to Medium-Yield Alternative Products = During periods of interest rate fluctuations, it is better to use short-term products rather than locking money into long-term products. It is advisable to focus on principal-guaranteed products while pursuing stable returns. Recklessly chasing high yields inevitably increases risks. Private bankers (PBs) at commercial banks recommend diversifying assets by mixing safe assets like gold and deposits with alternative investment products that have low risk but can pursue returns.

Representative safe assets include the US dollar and gold. Due to the recent sharp rise in the won-dollar exchange rate, small investments for diversification are recommended.

Gold can also be invested in through the Korea Exchange (KRX). You can buy and sell it like stocks via securities firms' Home Trading System (HTS) or Mobile Trading System (MTS) accounts. Income from gold investments is excluded from comprehensive financial income taxation. Using a gold account allows small investments and redemption anytime, but investment gains are subject to a 15.4% interest dividend income tax.

For those willing to take moderate risks and seek above-average returns, alternative investment products are worth attention. Real estate REITs and Exchange-Traded Funds (ETFs) are representative examples.

The REITs market has grown about twofold from 25 trillion won in 2016 to 50 trillion won by the end of last year. It operates by entrusting investors' funds to invest and manage real estate or real estate-related capital and equity, distributing rental income or capital gains as dividends. REITs can also be managed within retirement pensions and Individual Retirement Pensions (IRP).

There are four listed REITs in Korea: IREIT KOREA, Shinhan Alpha REIT, Lotte REIT, and NH Prime REIT. A commercial bank official said, "Listed REITs will be a useful means to increase returns by diversifying investments across various assets compared to low-interest products like deposits."

ETFs, which appeared like a comet in the early 1990s, are regarded as "the most innovative invention in the financial investment industry over the past 30 years." ETFs are financial products that list shares of index funds tracking price indices of stocks, bonds, currencies, commodities, etc., on exchanges for trading like stocks. They can be easily traded through individual stock trading accounts, have low transaction costs due to exemptions from securities transaction tax, and allow diversified investments with small amounts.

There are various options. Monthly dividend ETFs preferred by investors who want to use dividends as retirement living expenses, ETFs focused on growth sectors like cloud computing or electric vehicles, and REIT ETFs for those wanting to include real estate assets in their portfolios have emerged. Recently, demand for inverse ETFs has surged due to stock market declines.

Lee Sang-geon, Managing Director of Mirae Asset Retirement Research Institute, advised, "The most powerful way to use ETFs is dollar-cost averaging. To average purchase prices, you need to invest steadily over a certain period." He added, "It is good to prepare your own investment principles or methods for volatility management in advance, such as combining installment investments or additional purchases during downturns."

This content was produced with the assistance of AI translation services.