Article 1: How can you earn more from fixed deposit?
Fixed deposit (FD) - or term deposit- is one of the safest, oldest and most common investment avenues. In the UAE, although the returns from FDs are tax-free, inflation can affect the returns significantly
So is there any way you can maximise the returns from your FD? Here we describe the key ways in which you can earn more from your term deposit.
Compare FD interest rates
Most FDs in the UAE are short-term deposits with a maturity of 12 months or less. These could range from weekly, monthly, quarterly, half-yearly, and yearly tenors. Each FD comes with a pre-determined interest rate (or profit rate in the case of Islamic banks) that varies across different banks and different tenors.
However, not every monthly or quarterly FD comes with the same interest rate, as each lender will offer you a different rate of interest. It goes without saying that you must choose one that gives you the highest return.
Choose the right term
Whether you choose to have your FD interest paid monthly, quarterly or annually, make sure you don't need the funds back before its maturity. This will help you budget and avoid premature withdrawal charges from the bank.
Although some banks are offering premature withdrawal without penalty, many others are still continuing with it.
Leverage the power of compounding
When your FD has matured, you are free to withdraw your funds. However, in order to get a higher return, you should consider reinvesting the matured amount into another FD.
This is because when the maturity amount is reinvested the returns can be maximized, thanks to the power of compounding.
Therefore, if your bank offers a reinvestment of interest option, go for it. This is simply because the monthly or quarterly compound interest will generally make your term deposit worth more.
So how does it work?
An interest of 2% in a year would mean a yield return of 2.15% in a year if the reinvestment option is opted for.
What this means is that AED 1000 invested at the beginning of the year will amount to AED 1020.15 by the end of the year, slightly more than the usual AED 1020, if you keep on reinvesting the amount. This is because the interest earned is compounded every quarter. An interest of 2% in a year would imply an interest of 0.5% in a quarter. Hence AED 1000 invested would earn an interest of AED 5 (0.5% of AED 1000) at the end of first three months.
So the AED 1000 investment made by a person would amount to AED 1005 by the end of three months.
Repeating this process for the next three quarters, the person accumulates AED 1020.15 at the end of the year and hence a return of 2.15%, which is higher than the interest of 2%. Therefore, investors who do not need a regular income from the FD could maximise returns by opting for the reinvestment option.