What You Need to Know About Fixed Deposit Investment in Kenya

Fixed deposit investment in Kenya is one of the available financial investment options in the country. It involves investing your money with a financial institution such as a bank for a specific amount of time at a specific interest rate.

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After the investment, the bank uses your funds to invest in activities such as lending to customers and buying government bonds. The aim is to make more income enabling them to pay back both your principal and interest income.

One of the key advantages of this type of investment is you can find banks all over the country.

Upon expiry of the fixing period, the bank refunds both your principal and the applicable interest fewer tax charges.

Benefits of a Fixed deposit investment in Kenya

Low risk – This is one of the safest financial investment options in the country. The chances of a bank defaulting or going under remain very low due to the set safeguards against such occurrences. This makes it a suitable option for investors looking for low-risk options.

Even if some occurrence such as liquidation was to happen, your deposits are insured making it possible to get a refund. 

Fixed interest/ Guaranteed income – For this investment, you agree on the interest rate before fixing the money. This rate remains so for the contract duration unless there is an agreement to change it by both parties. This element gives you a guarantee in income that also helps with future financial planning because you know how much you will get and by what date.

Fixed duration – Just like income, the duration of the investment is clear and fixed upon which the banks refund both your principal and interest upon expiry. Such an arrangement enables you to do future planning with a high level of certainty. You can also choose to refix the funds upon expiry.

Negotiable rates – One of the key advantages of investing in fixed deposits is the ability to negotiate with your bank. There is always a negotiation room that you should take advantage of. However, successful negotiation depends on some factors such as the amount you are fixing, the bank, duration, and currency.  Higher amounts tend to attract higher rates and so is fixing for a longer duration.

Collateral

Loan collateral – Most banks allow you to use the fixed deposit as loan collateral making it easier to access secured funding. Using a fixed deposit as collateral also saves you ample time and cost that comes with using alternative collateral such as land. These form of collateral assets needs to undergo some legal process such as valuation and search. A process that consumes time and money. Learn more on Factors to Consider Before Taking in Kenya.

Enables Savings- The difficulty in accessing your funds makes it easier to grow your savings. This is because there is no motivation to liquidate the investment not unless you are willing to incur the liquidation costs.

Challenges of Fixed Deposit Investment

Low returns– Investing in fixed deposits may have lower returns in comparison to its peers in the market such as stock investments. One of the reasons for this is that government maintains tight control on the financial sectors such as regulating the interest rates.  Hence, the banks may be willing to offer but cannot due to the existing monetary restrictions.

Taxation costs- Income from fixed deposit investment is subject to a tax rate of 15%. This results in a reduction of the investment income. The rate is also uncompetitive to other investment options such as Sacco investment in Kenya which attract a 5% tax. Others such as government infrastructure bonds don’t attract any tax at all.

Funds access costs– A fixed deposit investment has a duration through which you can’t access your funds. However, if you chose to liquidate the investment, you should be ready to forego your interest leading to a loss of income. This is different from the money market fund investment that allows you to access your investment at will.

Factors to consider when doing fixed deposit investment in Kenya

Interest rate- This should be among the first consideration when doing fixed deposit investments in Kenya. As an investor, your goal should be to get the best rate possible. The only way to identify the best rates is through doing market research. You can achieve this by making calls or physically visiting the institutions.

Getting the best rates ensures you have the best value for your money. It is also key to note that rates keep on changing depending on the prevailing macro and micro economic conditions.

Amount- Most institutions have a minimum threshold on the amount that you can invest in fixed deposits. Hence, you need to ensure you at least have the minimum to invest. The interest rate you get also highly depends on the amount. Mostly, the higher the amount of investment, the higher the interest rate.

Duration- This defines the amount of time in which you want to fix your money with most institutions offering a minimum of 3 months options. In most cases, the longer the duration, the higher the interest rates. Hence, you should target fixing as long as you can to get maximum benefits.

However, you should also ensure the fixing duration is in sync with your needs. This is because if you liquidate before contract expiry, you will have to forego the interest.

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Organization- Although this is one of the most secure financial investment options, you should target to invest in well-known and regulated institutions such as banks. This helps to minimize the risk of loss. Other key factors to consider while settling on an investment organization include after-sale services such as investment advice.

Call deposits investment

Call deposits operate just like fixed deposits but are more flexible to investors. It is best suitable for This those investors that require short-term investment and may need to access their funds on short notice.

With call deposit investment, you can liquidate your investment on short notice and still get your interest income. However, there is a downside of investing in call deposits such as getting lower interest income.

Just like fixed deposit, investment income in the call deposit also attracts a 15% tax rate on liquidation.

The above factors form most of what you need to know about fixed deposit investment in Kenya.