Fixed Deposit Accounts vs Unit Trust Funds: Which Investment option is better?

February 15, 2024

Article 100

One of the most frequently asked question to me is to compare the Unit Trust Funds (UT Funds) and Fixed Deposit Accounts (FDAs). In this article, we will explore these options and try to shed light on their differences and similarities in order to help you make an informed decision.

Banks in Uganda offer competitive returns on Fixed Deposit Accounts. In the September 2023 review, it was observed that FDAs deliver good returns. However, when investing in an FDA, one should keep in mind that a small percentage of interest you have earned is lost if the money is withdrawn before the account matures. Most banks charge up to 10% of the interest earned. Hence, if there is a possibility of needing access to your money before the maturity date, an FDA may not be the most suitable investment option for you.

FDAs do have their advantages. They allow you to lock in a high interest rate for a longer period. This is opposed to UT Funds where the interest rates can fluctuate. If you prefer a more static return on your investment, an FDA could be the right choice for you.

On the other hand, Unit Trust Funds offer the best liquidity option. As an investor, you can access your money at any time without incurring any penalties. This is a major advantage for those who want the flexibility of withdrawing their funds at any time. This what makes Unit Trusts the best Investment vehicle for an emergency fund.

Furthermore, UT Funds generally promise attractive returns. As per December 2023 review, nearly 95% of UT Funds delivered a net yield of over 10% to investors irrespective of the invested balance, making it a good investment option for all types of investors.

Contrarily, while FDAs may seem to offer higher returns than UT Funds, it's important to note that these returns often fall below the inflation rate, especially when investing the minimum amount in an FDA.

Additionally, for FDAs, the interest earned is dependent on the deposit size and the duration for which it is fixed. Larger deposits fixed for longer periods usually earn higher interest rates (much better than Unit Trusts sometimes), providing an incentive for loaded investors to commit their money for a relatively longer time. In UT Funds, however, all amounts earn the same interest.

Finally, in terms of liquidity management at zero to no cost of accessing funds, UT Funds prove to be a superior option to Fixed Deposit Accounts. With UT Funds, you can manage your investment in a flexible manner, withdrawing or adding funds without worrying about withdrawal penalties or losing out on potential returns.

Below is the summary of the Top Banks’s Fixed Deposit Account rate as of September 2023.

Absa Bank

Absa Bank offers a minimum interest rate of 3.30% on FDAs, with the maximum rate being negotiable. The minimum balance required to open an FDA is 1,000,000 UGX.

Baroda Bank

Baroda provides a higher minimum interest rate of 5.00% on FDAs. The maximum interest rate goes up to 10.50%. The minimum balance required for an FDA is significantly lower at 100,000 UGX.

Centenary Bank

Centenary offers a minimum interest rate of 4% on FDAs. The maximum interest rate is negotiable.

Dfcu Bank

DFCU provides a minimum interest rate of 2.70% on FDAs, with the maximum rate reaching up to 9.30%. The minimum balance required to open an FDA is 1,000,000 UGX.

Equity Bank

Equity offers a minimum interest rate of 2% on FDAs. The maximum interest rate is significantly higher at 11.60%. However, the minimum balance required to open an FDA is higher at 5,000,000 UGX.

KCB Bank

KCB offers a negotiable interest rate on FDAs.

Stanbic Bank

Stanbic provides a minimum interest rate of 0.98% on FDAs, with the maximum rate reaching up to 9.67%. The minimum balance required to open an FDA is 1,000,000 UGX.

Standard Chartered Bank

Standard Chartered offers a higher minimum interest rate of 6% on FDAs. The maximum interest rate is the highest among the listed banks at 14%.

Alex Kakande