FedGroup has got some of the best rates in the country. But be careful. They are not as good as advertised.

FedGroup’s five-year fixed deposit offering was added to this website after a suggestion on Twitter from @stealthy_wealth - he runs a great site at http://www.stealthywealth.co.za/. Thanks @stealthy_wealth.

www.fedgroup.co.za

FedGroup is offering some of the best deposit rates in South Africa at the moment for their five-year deposits. Their website www.fedgroup.co.za features two offers. A Growth and an Income option. Both have a minimum R5000 deposit, 5 year term and a 9% nominal rate - read that fine-print at the bottom(!). The only difference is - with Growth your interest is only paid out maturity. Whilst the Income option pays out interest to you on a monthly basis. Thus with Growth you benefit from compounding as your interest is not paid out, but rather reinvested. So you earn interest on interest earned - aka compunding. However it is misleading to show 11.3%* effective. Crucially, the Growth option features the same 9% nominal - see FedGroup’s fine print. Thus the effective annual rate (EAN) is 9.38%. A very good rate but not quite as good in their advertised effective 11.3%.

Where does FedGroup’s advertised 11.3% come from?

This is a common misleading practice for banks when running adverts. The way they calculate the 11.3% rate is as follows:

  1. Total interest earned over period
  2. Divide by initial capital
  3. Then divide by number of years.

In this case, if you were to invest R10 000 with FedGroup (Growth option), you would get R 5 656 in total interest. Now take R 5656 divided by R 10 000 and then divide by five years. This gets you 11.3%.

Importantly, this 11.3% is NOT an effective annual rate. This is a simple rate (that is the official term - see definition at Investopia here ). It is misleading to say this rate is ‘effective’ . In fact, Absa (2018), Nedbank (2016) did the same a couple of years ago and ended up withdrawing their ads due to public outcry.

the fine print

Banks are not required by law to quote effective annual rates when disclosing their fixed deposit rates. So they are left to their own devices. They choose how they advertise their rates and continue to abuse this practice by providing incorrect terminology - in above case FedGroup is saying ‘effective’ even though it is a ‘simple’ rate - to mislead customers. This website does read the bank’s fine print (and in some cases has real difficulty reading the fine print!) and converts all the rates to effective annual rate (EAN). This is the ideal standard for comparing apples with apples. We will continue to call out banks for misleading ads.