Beware of this mis-selling: “Earn assured 12% returns”!

Beware! Corporate fixed deposits that offer 8.25% annual return are being marketed by prominently quoting their ten-year annual yield of 12.09%. A look at how this form of mis-selling based on a technicality.

The ad says,

Earn assured returns (first line – font size about half an inch)

upto 12.09* % p. a.  (second line – 12.09 is printed about 2 inches long!)

offered by AAA/AA+ raed FD schemes (third line – about normal font)

A table of corporate fd with returns (12.09 is no where to be seen)

(*) XYZ corporate bond offering 12.09% pa yield to maturity for 10Y deposit @ 8.5% p.ap compounding annually

How many would understand that 8.5% is the actual annual return on investment and this 12.09% – the most prominent figure in the ad has no relevance whatsoever to the investor?!

Sure, like all forms of mis-selling, the ad has technically correct information.  It is designed with only purpose: the audience must be given the impression that the assured return is 12.09% p.a

Sure this 12.09% is a measure of return, but it is not the annual return. The annual return is 8.5%.

If you invest Rs. 100, the value after 1 year = 100*(1+8.25%) = 108.3

after 2 years, 100(1+8.25%)(1+8.25%) =117.2

after 3 years, 100(1+8.25%)(1+8.25%)*(1+8.25%)  = 126.8 and so on.

The annualized yield is not constant. It will increase with each month of investment.

The annualized yield is equal to total gain made after ‘n’ years,  divided by ‘n’ of years invested.

After 1 Y the annual yield =  ((1+8.25%)-1)

After 2Y,   ((1+8.25%)^2-1)/2 =8.59%  (gain made after 2 years)/2

After 3Y,  ((1+8.25%)^3-1)/3 = 8.94%

After 10Y, ((1+8.25%)^10-1)/10 =12.09% 

Therefore, while the return which presents the rate at which money grows is constant for a fixed deposit, the annualized yield is nothing by the gain made per year and this increases with increase in the tenure of the deposit.

Corporate-deposit-return-yield

Instead of advertising the return of the deposit as 8.25%, the ad uses the 10-year annualized yield  of 12.09%, and makes it sound as if it is a product that gives you assured returns of 12.09%. Beware!

Do consider sharing this post with the buttons below.

Use this Fixed Deposits: Annual Yield vs. Annual Interest to understand more about yield and to calculate return from yield and yield from return.

The concept of yied for RD is discussed here: Recurring Deposit Calculator: Annualized Yield

Install Financial Freedom App! (Google Play Store)

Install Freefincal Retirement Planner App! (Google Play Store)

book-footer

Buy our New Book!

You Can Be Rich With Goal-based Investing A book by  P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!
Practical advice + calculators for you to develop personalised investment solutions

Thank you for reading. You may also like

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete  the entire comment or remove the links before approving them.

Do let us know what you think about the article