Last week, I started the investors choice series and I discussed about bond. Today, I will be enlightening you on what you need to know about Fixed Deposit.
What is Fixed Deposit?
Fixed Deposit as the name implies is the money you deposit with a bank at an agreed interest rate for a period of time, typically between one and twelve months. Fixed deposit is another low risk investment where the agreed rate is not affected by the fluctuation in the stock market once booked. The interest rate for fixed deposit is calculated per annum; therefore to enjoy the full benefit as contained in the application form, an investor is expected to leave their investment for the agreed tenor. For instance, if a customer decides to invest ₦2,000,000 in a fixed deposit for a period of 180 days at the rate of 13%, the expected accrued interest at maturity less withholding tax is (Principal x Rate x Time) i.e. ₦2,000,000 x 0.3% x 0.4931 = ₦128,219 less 10% withholding tax = 115,397.28. But if the customer decides to terminate the investment after 90 days, he will only be paid interest on the 90 days. In most cases, customers are charged early termination fees ONLY on the interest accrued and not the PRINCIPAL. This means that whatever happens, the principal is guaranteed.
The interest paid on fixed deposit is largely dependent on the tenor and amount invested. The longer the tenor, the higher the interest rate.
What you should know about fixed deposit?
- Interest rate differs from bank to bank, in order to get the best interest; there is a need to visit more than one bank to find out about their prevailing interest rate.
- It is a flexible investment option. This simply means you can terminate your investment anytime before maturity. Though there will be early termination penalty charge applied ONLY on the accrued interest.
- Interest rate for fixed deposit is negotiable. This usually happens when the customer is offering to invest huge sums of money in a bank.
- Customers are aware of the value of the interest due to them at maturity before placing their money. In other words, before you put your money in a fixed deposit, you will know the actual Naira value expected to be paid to you as interest at maturity. This, unlike stocks will help you in your decision making.
- There are different options to receiving your interest on fixed deposit accounts.
- Monthly payment – For example, you can invest your money for 12 months and request that your interest is paid into your transactional account (Savings or Current) on a monthly basis.
- Maturity payment – This is paid at the end of the tenure of investment
- Multiple fixed deposit accounts are allowed in a bank.
- There are also different termination options available for customers who put their money in fixed deposit at maturity
- Terminate interest and principal – this means the customer demands to be paid both principal and interest accrued at maturity.
- Terminate interest and roll over principal – this means customer demands to be paid ONLY the interest at maturity while the principal is rolled over for another agreed tenure. Note however that the roll over is done at the prevailing market rate.
- Roll over interest and principal – this means at maturity, the principal and interest accrued is to be rolled over for an agreed period of time.
Fixed Deposit: Common terms you should be familiar with;
- Interest rate- this is the rate the bank has agreed to pay on the value of investment at maturity. Customers are to ensure that this rate is boldly written on the application form. The rate does not usually change once the fixed deposit is booked.
- Maturity date – this is the expected date the customer is expected to be paid in accordance with the instruction given on the application form.
- Principal – this is the initial amount a customer place in fixed deposit account. The minimum amount in Nigeria is ₦100, 000.
- Penalty Charge – This is the fee charged on your interest when the investment is terminated before the agreed date.
Benefits of having fixed deposit accounts –
- It’s flexible to operate.
- Interest rate is not affected by the uncertainty in the stock markets.
- It gives you a stream of income on a regular basis.
- It’s a guaranteed investment as long as the bank is operational.
- Interest paid is higher than regular savings account.
Note that information provided is to guide you to take an informed decision on your investment. For further details on interest rates and tenors, visit your bank.