Last Updated on December 31, 2015
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.
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
Use our Robo-advisory Excel Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
- Follow us on Google News.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Join our YouTube Community and explore more than 1000 videos!
- Have a question? Subscribe to our newsletter with this form.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)