Deceptive prominence of annualised yield

Have you come across “annualised yield” in FD (Fixed deposit) advertisements? A granular search for the term would make you find it, at the bottom of the notice, printed in miniature font. Lets’ ponder on what is deceiving with the term’s usage in advertisements.

Annualised Yield draws its foundation from the concept of compounding. So, are banks offering compound interest on their deposits? The answer to this depends on the genus of FD, tenure and compounding intervals (monthly, bi-annually etc). For instance, compound / simple interest yields the same return for a FD with one-year tenure, compounded annually.

Let’s perceive through a numerical instance –

From the above numerical instance, the principal doubles in 7.27 years. For annualised yield purposes, return equates 100% (as principal doubles) divided by 7.27 (tenure during which it doubles) gives us 13.76% p.a. Whereas, the bank effectively continues to pay 10% p.a (on the cumulative amount). The average return, turns out to be much higher than what the bank pays theoretically. In reality, interest received is deposited as an addition to the principal. As principal increases yearly, returns improve in absolute terms despite return rates stay put. Banks are infinitely astute, to publish what we get & not what they pay! For an interest craving investor, substantially senior citizens, even a nanoscopic difference in rates matters. Furthermore, annualised yields are brazenly misleading depositors, who have opted for interest payouts at regular intervals, as no compounding happens on their principals.

Are the banks making an attempt to renege on interest rates published in the ads? Squeaky clean, nay. Pick out a legitimate FD receipt – you will find the simple interest rate & not the annualised yield. I reiterate, Banks are astute enough to publish, what we get & not what they pay – in advertisements, but not FD receipts.( as FD receipts are akin to legally bound contracts)

Select banks prove to surpass the return of its peers vis-a-vis a specific tenure. For instance, Yes banks provides 5% p.a returns over 45 days tenure, whereas Equitas bank provides 4.5% p.a over the same. Yes bank provides 7.25% p.a on a 888 days tenure, whereas Equitas handsomely rewards its investors with 8.00% p.a. A short term investor would prefer YES, but not his long term peer. So, cherry pick a bank, bearing in mind your investment tenure.

Observe the advertisement carefully. Its pivotal to go through * marks in the advertisements, to circumvent falling for the cynosure numerical values (annualised yield) . Let’s turn a bit savvier by focusing on granular aspects. In my conjecture, RBI (Reserve bank of India) should promulgate a stance, making it mandatory to publish real interest rates alongside annualised yield.

-Arunachalam Sivaraman

Published by adithyaarunachalam

I'm a millennial, from Chennai, India. Passionate about building up a career in finance, I follow and stay abreast on news feeds. I'm a novice blogger, So feel free to pass on your conjecture to me @adithyaarunachalam@Gmail.com

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