This article tells all you should know about a fixed deposit, how to invest in it, how to open a fixed deposit account, what to expect from a fixed deposit investment, and how you can make money from it.
A fixed deposit is an investment in which a certain amount is invested at a fixed interest rate and term. While all banks provide this investment opportunity; the interest rates offered, however, may differ from one bank to another.
The amount of profit or interest earned on an investment is fixed when the depositor places money in a fixed deposit. Regardless of changes in interest rates, the rate does not rise or fall.
Fixed deposits may be withdrawn before the maturity date and have maturities ranging from one week to five years. The bank may impose an early withdrawal fee or penalty if money is withdrawn before the due date.
The interest is usually calculated using the key elements of, the principal, tenor, and rate.
It has the advantage of a better rate than a savings deposit and comes with a guarantee of returns. An individual also has the advantage of making multiple fixed deposits with various banks and under different terms.
Documents required to open a fixed deposit
- A completed fixed-term deposit application form from the bank.
- A valid form of identification, such as a passport or driver’s license.
- Utility Bill of Applicant (rent receipt, water rate).
- Two passport photographs
How much you can earn from a fixed deposit investment
- Most Nigerian banks offer fixed deposit rates in the range of 7% to 12% which also depends on how much money is being deposited
- The more money available to invest, the higher the return.
Features of a typical fixed deposit investment
- Fixed deposit investment requires a minimum opening balance of N100,000.
- The tenor or investment period is a minimum of 30 days and a maximum of 360 days
- The total accrued interest that is not earned will be lost if the investment is cancelled before it reaches maturity. Consequently, the depositor will only receive the portion of the interest that was earned during the time that the money was in the bank.
- The customer has the option of terminating the investment amount.
- Withholding tax (WHT), which is typically subtracted from the interest earned, must be withheld from the interest paid to the depositor. The interest paid to the depositor is subject to a 10% withholding tax
- In comparison to other regular deposit rates, the interest rate is higher.
- The depositor has the option to withdraw his money before the fixed deposit matures, but doing so could cost him some money
- Fixed deposit interest rates vary from bank to bank, customer to customer, and amount to amount.
- Upon maturity, the bank pays the depositor both the principal and interest. A customer, on the other hand, can request a rollover.
- Fixed deposits are guaranteed as long as the bank is solvent.
- Fixed deposits can be used as collateral, but not all banks accept them.
- The bank makes money by charging borrowers a higher interest rate on the money they deposit in fixed deposits. The bank’s profit is the difference between the interest you receive on a fixed deposit and the interest your lenders receive.
Advantages of fixed deposit investment
- Provides a higher rate compared to a savings deposit.
- The returns from this investment are guaranteed.
- An individual can have several fixed deposit investments with different banks and at different terms