7 things you need to know about Fixed Deposit Accounts in Kenya

What is a fixed deposit account?

A fixed deposit account, commonly known as an FD account, is a type of savings account offered by banks and financial institutions. In a fixed deposit account, customers deposit a certain sum of money for a specified period, ranging from a few months to several years, at a fixed interest rate. The deposited amount and the interest rate are predetermined and remain unchanged throughout the tenure of the deposit.

Features of a fixed deposit account typically include:

• Fixed Tenure: The money is deposited for a fixed period, and withdrawal before the maturity date may attract penalties.
• Fixed Interest Rate: The interest rate is predetermined and remains constant throughout the tenure of the deposit.
• Interest Payout: Interest can be paid out at regular intervals (monthly, quarterly, annually) or compounded and paid at the end of the tenure.
• Minimum Deposit Amount: Banks usually require a minimum deposit amount to open an FD account.
• Tax Implications: Interest earned on fixed deposits is generally taxable as per the prevailing tax laws of the country.
• Safety: Fixed deposits are typically considered safe investments because they are backed by the government or regulatory authorities up to a certain limit (e.g., deposit insurance).

How much interest does a fixed deposit account earn

Fixed deposit accounts in Kenya offer varying interest rates based on the bank and the deposit tenure. Depending on the account, most FD accounts offer between 7%-10% depending on the amount of deposit.

withdrawing money from a fixed deposit account

Yes, you can usually withdraw money from a fixed deposit account before its maturity date, but doing so typically incurs penalties or forfeiting of interest. Fixed deposits are intended for a specific period, and premature withdrawals may disrupt the bank’s planning and interest rate calculations.

Here are some key points to consider regarding withdrawing money from a fixed deposit account:

• Penalties: Banks often charge penalties for premature withdrawals from fixed deposit accounts. These penalties can vary depending on the bank and the terms of the fixed deposit agreement.
• Forfeiture of Interest: In addition to penalties, withdrawing money before the maturity date may result in the forfeiture of a portion of the interest earned on the deposit. The bank may pay a reduced interest rate on premature withdrawals.
• Partial Withdrawals: Some banks may allow partial withdrawals from fixed deposit accounts, but similar penalties and forfeiture of interest may apply to the withdrawn amount.
• Emergency Withdrawals: In case of emergencies, some banks may allow premature withdrawals from fixed deposit accounts without penalties, but this depends on the bank’s policies and the circumstances of the emergency.
• Liquidity: Fixed deposits are not as liquid as savings or current accounts. They are designed for individuals who can commit funds for a fixed period without needing immediate access to the money.

Before withdrawing money from a fixed deposit account, it’s essential to review the terms and conditions of the deposit agreement, including any penalties, forfeiture rules, and potential impacts on interest earnings. If you’re unsure about the terms or consequences of early withdrawal, it’s best to contact your bank for clarification.

Advantages of a fixed deposit account

Whether a fixed deposit account is a good option for you depends on your financial goals, risk tolerance, and liquidity needs. Here are some factors to consider when deciding if a fixed deposit account is suitable for you:

• Safety: Fixed deposits are generally considered safe investments because they are backed by the government or regulatory authorities up to a certain limit (e.g., deposit insurance). If safety and capital preservation are your primary concerns, fixed deposits can be a good choice.
• Stability: Fixed deposits offer a fixed interest rate for a predetermined period, providing stability and predictability of returns. If you prefer a steady stream of income and are not concerned about higher potential returns from riskier investments, fixed deposits can be a good option.
• Low Risk: Fixed deposits carry lower risk compared to investments in the stock market or other volatile assets. If you’re risk-averse or have a low tolerance for market fluctuations, fixed deposits can provide peace of mind.
• Liquidity: Fixed deposits are less liquid than savings or current accounts because withdrawing money before the maturity date may result in penalties or forfeiture of interest. If you require easy access to your funds or anticipate needing them in the short term, fixed deposits may not be the best option.
• Interest Rates: The interest rates offered on fixed deposits may vary depending on market conditions, economic factors, and the policies of the bank or financial institution. It’s essential to compare interest rates across different banks and consider the impact of taxation on your overall returns.
• Financial Goals: Consider your financial goals and investment objectives when deciding whether to open a fixed deposit account. If your goal is capital preservation, steady income, or short-term savings for specific financial goals (e.g., buying a car, funding a vacation), fixed deposits can be a suitable choice.

Overall, fixed deposit accounts can be a good option for individuals seeking safety, stability, and predictable returns on their savings. However, it’s essential to weigh the pros and cons carefully and consider your individual financial circumstances before making a decision. Consulting with a financial advisor can also help you determine the most appropriate investment strategy for your needs.

Fixed Deposit payout options

Fixed deposits typically offer two options for interest payouts:

• Cumulative (at Maturity): In this option, the interest earned on the fixed deposit is compounded and paid along with the principal amount at the end of the deposit tenure. This means you receive the total principal plus accumulated interest upon maturity.
• Non-Cumulative (Regular Payout): With this option, the interest earned on the fixed deposit is paid out at regular intervals, which could be monthly, quarterly, semi-annually, or annually, depending on the terms of the fixed deposit.

If you opt for the non-cumulative option, you can receive monthly interest payments. However, not all banks offer monthly interest payouts for fixed deposits. Some banks may offer quarterly, semi-annual, or annual interest payments instead. It ultimately depends on the policies and products offered by the bank where you have the fixed deposit

Disadvantage of a fixed deposit

While fixed deposits offer several advantages such as safety, stability, and predictable returns, they also have some disadvantages. Here are some potential drawbacks of fixed deposit accounts:

1. Low Returns: Fixed deposits generally offer lower returns compared to riskier investments such as stocks, mutual funds, or real estate. The interest rates on fixed deposits may not always keep pace with inflation, meaning that the real (inflation-adjusted) returns could be minimal.
2. Lack of Liquidity: Fixed deposits are not as liquid as savings or current accounts. Withdrawing money before the maturity date may result in penalties or forfeiture of interest. If you need access to your funds in the short term, fixed deposits may not be the best option.
3. Interest Rate Risk: Once you lock your money into a fixed deposit at a specific interest rate, you are exposed to interest rate risk. If interest rates rise after you’ve opened the fixed deposit, you may miss out on higher returns available in the market.
4. Opportunity Cost: By tying up your funds in a fixed deposit, you may miss out on potential investment opportunities that could offer higher returns over the long term. This is especially relevant in a rising interest rate environment or when considering investments with higher growth potential.
5. Taxation: The interest earned on fixed deposits is generally taxable as per the prevailing tax laws of the country. Depending on your tax bracket and the taxation rules applicable to fixed deposits in your jurisdiction, the after-tax returns from fixed deposits may be lower than expected.
6. Inflation Risk: Fixed deposits may not provide adequate protection against inflation. If the rate of inflation exceeds the fixed deposit interest rate, the purchasing power of your money may decrease over time.
7. Minimum Deposit Requirements: Some banks may have minimum deposit requirements for opening a fixed deposit account, which may be higher than what you’re willing or able to invest.

Withdrawing money from a fixed deposit after maturity

Withdrawing money from a fixed deposit after maturity is a straightforward process. Here are the typical steps involved:

1. Notification: Many banks will notify you in advance as the maturity date of your fixed deposit approaches. This notification may be sent via email, SMS, or physical mail, depending on your communication preferences with the bank.
2. Visit the Bank: On or after the maturity date, visit the bank branch where you hold the fixed deposit account. You will need to bring along identification documents such as your passport, driver’s license, or any other government-issued ID for verification purposes.
3. Fill Out Withdrawal Form: Request a withdrawal form from the bank staff. You will need to fill out the form with details such as your account number, the amount you wish to withdraw, and your signature.
4. Provide Fixed Deposit Certificate: Present the fixed deposit certificate or receipt to the bank staff. This document serves as proof of your investment and will be required for processing the withdrawal.
5. Verify Details: Double-check the details filled out on the withdrawal form to ensure accuracy. Mistakes or discrepancies could delay the processing of your withdrawal.
6. Submit Form and Certificate: Submit the filled-out withdrawal form along with the fixed deposit certificate to the bank staff. They will process your request and prepare the necessary paperwork for the withdrawal.
7. Receive Payment: Once the withdrawal request is processed, the bank will either credit the withdrawn amount to your linked bank account or issue a check payable to you, depending on your preference and the bank’s policies.
8. Closure or Renewal: After withdrawing the funds, you have the option to close the fixed deposit account if you no longer wish to maintain it. Alternatively, you can choose to renew the fixed deposit for another term if you want to continue investing with the bank.

Loan against a fixed deposit (FD)

A loan against a fixed deposit (FD) is a financial product offered by banks and financial institutions that allows individuals to borrow money against the security of their fixed deposit accounts. In this arrangement, the fixed deposit serves as collateral for the loan. Here’s how it typically works:

• Eligibility: To avail a loan against a fixed deposit, you must have an existing fixed deposit account with the bank or financial institution offering the loan. The amount you can borrow typically depends on the value of your fixed deposit.
• Loan Amount: Generally, banks offer loans of up to a certain percentage (usually 70-90%) of the value of the fixed deposit. The maximum loan amount depends on the policies of the bank and the terms of the fixed deposit agreement.
• Interest Rate: The interest rate on a loan against a fixed deposit is typically lower compared to other types of loans because the fixed deposit serves as collateral, reducing the risk for the lender. The interest rate may be fixed or variable and is usually slightly higher than the interest rate earned on the fixed deposit.
• Tenure: The tenure of the loan against the fixed deposit is often linked to the remaining tenure of the fixed deposit. For example, if you have a fixed deposit with a maturity period of one year, you may be eligible for a loan with a tenure of up to one year.
• Repayment: Repayment of the loan against the fixed deposit can be structured in various ways, including through monthly instalments, bullet payments (where the entire principal and interest are repaid at the end of the loan tenure), or interest-only payments with the principal amount repaid at the end.
• No Prepayment Penalty: Some banks may allow you to pre-pay the loan against the fixed deposit without any penalty, allowing you to save on interest costs if you have surplus funds.
• Impact on Fixed Deposit: While the fixed deposit serves as collateral for the loan, it continues to earn interest during the loan tenure. However, the fixed deposit may be partially or fully encashed by the bank in case of default on the loan repayment.

A loan against a fixed deposit can be a convenient option for individuals who need access to funds without breaking their fixed deposit and losing out on interest earnings. It provides a way to leverage the value of the fixed deposit while retaining ownership of the investment. However, it’s essential to consider the terms and conditions of the loan, including interest rates, fees, and repayment terms, before availing such a loan.