Fixed deposits are savings vehicles that investors can use to grow their wealth which offer stable, predictable returns over a specific time (lock in period). But here's some information about fixed deposits and how they work.
What Are Fixed Deposits?
A Fixed deposit is a financial instrument offered primarily by banks. Fixed Deposits provide safe and reliable way to invest your money while earning predictable returns over a predetermined period. These periods typically range from 3 months to 5 years, allowing you to choose a timeframe that suits your financial goals and needs.
Predictable Returns
One of the key advantages of fixed deposits is their predictability. Unlike other forms of investment such as shares and investment portfolios, where returns can fluctuate, fixed deposits offer a guaranteed rate of return. This makes them particularly attractive for individuals who prioritize stability and security in their investments.
Factors Influencing Returns
Now that you understand some of the broader structures of fixed deposits, lets understand what would influence returns. The amount you invest has an impact on your overall return offered, and this means that if you invest i.e R500k or more, you will get a better return than a person wanting to invest R2k. Then the time you select to maturity (lock in period), will have an impact This means that your return will be lower when you select a 3 or 6 month term, as opposed to 5 years. Generally the longer you are willing to commit your funds, the higher the interest you will receive.
Do I pay tax on it?
You most certainly do. You will get an annual tax certificate issued by the institution on the interest earned, which must be submitted with your annual tax submission.
Security and Peace of Mind
Perhaps most appealing aspect of fixed deposits is the security they offer. Your principal amount is protected, and with guaranteed returns, you can rest assured knowing exactly how much you will receive at the end of the contractual term. The stability makes fixed deposits an ideal choice for risk-averse investors or those looking to diversify their portfolio with low-risk assets.
Current Fixed Deposit rates:
Some food for thought:
When banks offer fixed deposits they offer better returns the longer the monies are invested. This offers them the opportunity to use the monies you invested to lend it with high interest to credit worthy customers.
In some fixed deposit structures, you cannot do any draws on the capital investment before the end of the contractual period. But some providers do allow for a draw, subject to certain limitations.
Most asset managers and insurers do offer guaranteed investments with very competitive fixed rates to provide you with a similar return. Obviously its subject to their rates and validation.
Conclusion:
South Africans should all start saving as soon as they start working.
Then diversify out into the investment world, and structure a well balanced portfolio holding various asset classes over time as this is the most effective way to ensure that you have the best possible return over time.
"Adopting a habit of saving/ investing some money for a rainy day will pay you back 10 fold when the time comes." - anon.
Comments