Is a fixed deposit the best investment option for you?

20/07/2020

Is a fixed deposit the best investment option for you?

So, you’ve got some extra money available and you’re looking for somewhere to invest it? First off, well done! In the current economic times, due to the financial uncertainty created by the Coronavirus pandemic, that’s a great achievement. We understand that looking for ways to grow your money can be a daunting task, especially when there’s so much economic uncertainty.

Taking this uncertainty into account, now is probably a good time to look into fixed deposits if you’re new to the world of financial investment. This type of investment model offers one of the more secure and convenient ways to invest your money.

There is no question that one of the most stressful parts of building a financial plan is actually understanding every option you have available. That is why we’re diving into fixed deposits and when it’s the best time to invest with them.

So, what is a fixed deposit investment?

Fixed deposits are one of the more traditional forms of investment. It’s a smart choice to include in your investment portfolio.

A fixed deposit is when you invest a fixed amount for a fixed duration, with a fixed interest rate. Because all of the variables are fixed, you get a guaranteed growth. When doing the initial deposit, you need to decide on a fixed term for the investment, between 3 to 60 months. This, along with whether or not you want to pull out the interest earned during the term, will influence your interest rate. The longer you leave your investment, the higher you return will be. With African Bank, you can earn up to 12.22% interest per annum, with a 60-month fixed deposit.

 

When would you choose a fixed deposit over other types of investments?

The main thing to understand with fixed deposits is that your money is held up in the account for the duration of the chosen term. Whether you select three months or 12 months, you can’t touch that money for the full duration. If you do, you’ll be penalised.

So, if you have money available to invest — this is money that you know for sure you won’t need for a certain period of time — then, a fixed deposit is an option. You’re not only putting money away knowing that you’ll have it when you need it, but you’re also earning interest on it in the meantime.

Perhaps you are putting money away for your kid’s university fees that you know you’ll need in two years’ time. You can then invest in a fixed deposit for 24 months. Or perhaps your wedding had to be postponed due to the lockdown. You have already saved up the money, so why not put it into a fixed deposit investment for 12 months (or for however long you’ve postponed your wedding). That way, you know that you won’t slowly start dipping into your savings over the next few months. It’s tucked away safely and growing while doing so. Win-win, right?

Another instance when you may consider a fixed deposit is when you receive a cash windfall, such as an inheritance. You may decide to invest the money into a 3-month fixed deposit, using it as a form of holding area for your money until you decide on a full investment strategy.

This is a great way to invest short-term (up to five years) with low risk and a guaranteed return. It’s also much safer than keeping your money stashed away under your bed!

What returns can you expect with a fixed deposit?

Fixed deposits are tiered. This means that a larger sum of money invested over a longer period will give you the highest interest rate. Your final payout will also increase substantially if you resist the temptation to cash in on monthly interest payouts.

Here’s an example of how this would work: If you invested R100 000 for 60 months, at an interest rate of 9.65%, you will earn R798.33 per month. If you withdraw that monthly interest, your total payout at the end of the 60 months would be R147 899.80. However, if you only withdraw your interest on expiry, the interest will increase to 12.22%. That would net you a total payout of R161 139.15 at the end of the 60 months.

With fixed deposits, it pays to be patient. The longer you wait, and the longer you hold out on cashing in on the interest earned, the more returns you can expect to see. You can set your interest payout frequency to monthly, semi-annually, annually or on expiry.

When should you not consider a fixed deposit?

A fixed deposit is not an ideal option if you are uncertain about what your financial future might hold. Due to the impact the Coronavirus pandemic has had on many South African businesses, this anxiety is quite prevalent at the moment. If you’ve had a pay cut in the last few months, or are working in an industry that has suffered a number of job cuts, a better investment option would be a notice deposit account.

Job uncertainty or a loss in earnings could create the need to dip into your savings in a few months’ time. In this case, your money would be better off in an investment account that you can easily access. There are instances where you can withdraw from your fixed deposit account, but you’ll need to substantiate your reasoning with the bank and will be subjected to early withdrawal fees.

Another instance when a fixed deposit may not work for you is if you want to regularly add to your investment. You can only invest one initial deposit for the duration of the chosen term. This makes the fixed deposit a better option for people who already have a lump sum of money to invest, rather than someone who is looking to add smaller amounts each month.

You should also keep in mind that building your savings by investment is better than letting it gather dust in a regular account. So, even if a fixed deposit is not for you, then it’s important to look into other, more flexible, investment account options.

Don’t forget about the tax

When considering different investment methods, it’s good to always look into the tax implications.

Fixed deposits give you the option to hold off on pulling out any interest earned until the expiry date of the investment. However, even if you aren’t receiving that interest during your fixed investment term, you will still need to pay tax on it. You will be liable for the tax on your interest earned each year as if you had received it.

For example, if you receive 10% interest on a R500 000 deposit, in the first year your account will receive R50 000 in interest. You will be taxed on this amount in line with the various tax brackets. This is something to consider when looking at different investment options.

With African Bank, you can open up a Fixed Deposit account with as little as R500. So, even in these tough economic times, it’s still possible to put money aside for your future. And a fixed deposit is a great way to invest short-term, with low risks and guaranteed returns. African Bank’s 60-month Fixed Deposit investment offers the best return on investment in South Africa with 12.22% interest!

Up Next

How to save money monthly
Many people are unsure of the best way to save money. As a result they’re not saving smartly, or not saving at all. Follow this guide on how to save money monthly.

Publish Date: 07/03/2019
Read more
Budgeting is as easy as 50/20/30
While most people know that a budget is necessary, many simply don’t know how to put one together. We’re here to tell you, drawing up a budget isn’t as confusing as you think it is.

Publish Date: 19/03/2020
Read more
Investing in women: An African Bank priority
Many women are now the main breadwinners in their families and form the support structures of their communities.

Publish Date: 01/12/2017
Read more
Three types of credit card fraud – and how to protect yourself
Read this blog post to familiarize yourself with these scams and know how to protect yourself.

Publish Date: 17/04/2018
Read more
Know your rights when applying for a loan
With times being so tough for many consumers, applying for a loan could give you the means to change your circumstances.

Publish Date: 17/04/2018
Read more

About African Bank

Our mission is to be a successful Retail Bank offering a wide range of products and services to the consumers of South Africa. The people who work for African Bank represent the diverse population of South Africa; therefore we are a reflection of you, of all South Africans. We seek to provide value - more than our consumers expect of us. We promise to live our purpose 'humanity through banking' in all that we do and we are confident that we can, because 'We are You'.