High deposit interest rates: myth or reality

Deposit income depends on a number of factors: currency, term, amount, withdraw and replenish policy, and compound interest. Usually, the later the maturity date, the larger the amount and the less opportunities to use the savings on the deposit, the higher the interest.

Compound Interest, meaning transferring of the earned deposit interest back to the deposit, can ensure higher deposit income. With rising deposit amount thanks to compound interest, the overall profit goes up.

Let’s consider options with and without compound interest using simple examples.

• If your deposit does not offer compound interest, the income will be calculated based on the initial amount of the deposit.

So if you deposit RUB 1,000,000 at 4.5%, after a year you will receive RUB 1,045,000. Your income will be RUB 45,000.

• On the other hand, with compound interest, the interest is applied on top of the initial principal plus the interest accrued during the previous months. This is called compound interest.

For example, if you open a one-year deposit for RUB 1,000,000 at 4.5% with compound interest accrued monthly, then every month the amount on the deposit will increase by 0.375% (we divided 4.5% per annum into 12 months).

In the first month, the amount on the deposit will increase by RUB 3,750. In a month, the interest will be accrued on RUB 1,003,750, which will later increase by RUB 3764. As a result, in a year you will save RUB 1,045,939.83. The deposit income will total at RUB 45,939.83.

How can I get the best interest?

Sometimes banks offer promotional deposits. They offer a better interest, usually have a short term and do not allow to replenish or withdraw funds. Such offers are usually limited, so stay tuned to your bank’s news letters. Before opening a promotional deposit, make sure the bank is reliable. At least, check the license.

Sometimes banks offer to replace a deposit with other financial products. For example, investment life insurance (ILI), mutual funds, investments in securities, and non-state pension provision (NPF) contracts. Such products can bring a higher income, but it is not guaranteed. Unlike a deposit, there is a risk of not earning the expected profit.

The bank can also offer a combination of the two: some part of your savings will be put on a deposit, while another part will be invested in other instruments. With this option the client is protected from large financial losses. With the deposit bringing you a certain constant income, investments in other instruments give you an opportunity to earn more. At the same time, the return on investment is not guaranteed.

There are deposits with so-called ladder interest. The term of such deposits is usually divided into several periods, and the interest rate varies from period to period. At the same time, the advertisement might mention only the highest rate. For example, during the first 3 months the rate will be 3%, reaching 4% and staying at that level for the next three months, and then increasing to 9%. A company might advertise a 9% rate, while the average interest on a monthly basis will be lower.

Special conditions might apply to interest accrual depending on the minimum or average amount on the deposit.

For example, you’ll get 4% if you have up to RUB 100,000 and 6% if you have more than RUB 100,000. That means that if you had RUB 101,000 on your one-year deposit for 11 months, and on the 12th month you decreased it to RUB 99,000, then only 4% will be applied based on the monthly average deposit balance (11 * 101 + 1 * 99) / 12 = 100.8

Make sure to carefully read the rules for accruing interest.

If you see a high deposit rate...

What details should you focus on if the deposit rate is much higher than average?

To begin with, you can correlate the rate with the basic deposit yield level on the website of the Central Bank. If the rate is much higher, carefully read the terms of the contract. Check some important things.