This articles explains investing in Fixed Deposit and how much you can make from it and how it is calculated.
A fixed deposit is an investment with a specific amount invested at an agreed interest rate and tenor. All banks in Nigeria offer this investment opportunity, however the rates you get when you invest in one bank may differ from what you get from another.
Features of a typical fixed deposit investment
- Investment period (tenor) is a minimum of 30 days and a maximum of 360 days.
- The Minimum opening balance for this investment is N100,000.
- If the investment is terminated before maturity the total accrued interest not earned will be forfeited. Meaning only the portion of interest earned in the period that your money was in the bank is what will be paid to you.
- The investment amount can be terminated at the customer’s discretion.
- The interest paid to the depositor is subject to Withholding tax (WHT), which is usually deducted from the interest earned.
Advantages of Fixed Deposit Investment
- Provides a higher rate compared to a Savings deposit.
- Guaranteed returns – The returns from this investment is guaranteed.
- Highly liquid – The money can be terminated to fund short term liquidity needs.
- Flexible in nature – An individual can have several fixed deposit investments with different banks and at different terms.
[Read Also: Fixed Deposits or Treasury Bills, Which Is Better?]
Documents needed to open a fixed deposit
- Filled fixed term deposit form which will be provided by the bank.
- Valid means of identification (National ID, Passport, Driver’s license).
- Utility Bill of Applicant (water rate, tenement, rent receipt).
- Two passport photographs.
- Customer investment advice.
How much you get
- Fixed deposit rates for most Nigerian banks can earn between 7% and 12% depending on how much you have.
- The more money you have available to invest, the higher your return.
- For example, to get up to 12% you might have to invest in millions of naira.
How to Calculate Interest on Fixed Deposit
Fixed deposit investments are usually calculated using simple interest, which means the key elements to take note of include; Principal, tenor and rate.
[Read Also: Difference Between Fixed Deposit and Treasury Bills]
Example 1
If Mr Bello invests N1,000,000 in fixed deposit with a Nigerian bank for a 30 day tenor and the bank offers 7%, how much will he make after 30 days?
Principal – N1,000,000
Rate – 7%
Tenor – 30 days
Step 1: Calculate interest to be earned
= 1,000,000 x 0.07 x 30/365 = 5753.425.
The interest on this investment will be N5753.425.
Step 2: Calculate interest net of withholding tax – This is because banks charge 10% WHT on interest.
WHT = 10% (0.1) x 5753.425 = 575.3425
Net interest = 5,753.425-575.3425 = 5178.082
Step 3: Calculate total amount to be earned at maturity
Total amount at maturity = N1,000,000 (Principal) + N5,178.082 (Net interest) = 1,005,178
Example 2
If Mr Bello decides to increase his investment to N1,500,000 at a higher rate of 9% for a 90 day maturity offered by the bank, what will be his total investment after 90 days?
The same principles will apply;
Step 1: Calculate interest to be earned
= 1,500,000 x 0.09 x 90/365 = 33,287.67.
The interest on this investment will be N33,287.67.
Step 2: Calculate interest net of withholding tax – This is because most banks usually charge 10% WHT on interest.
WHT = 10% (0.1) x 33,287.67 = 3,328.77
Net interest = 33,287.67-3.328.77 = 29,958.90
[Read Also: The Pain and Gain of Money Market Fund Investment]
Step 3: Calculate total amount to be earned at maturity
Total amount at maturity = N1,500,000 (Principal) + N29,958.90 (Net interest) = 1,529,958.90
If you plan to invest in a fixed deposit, it will be wise to contact between 3-5 banks and find out which bank offers the most competitive rate before placing your money.