Percentage rates of investments: Interpreting them correctly

percentage rates of investments

Percentage rates appear to be popular in many financial publications. We see them in different forms- either positive or negative. As investors, some common areas we find percentage rates interesting are documents that deal with investment returns or profits. Many investors, as well as prospective ones, look out for rates quoted by financial institutions to make informed decisions. Unfortunately, most prospective investors get confused in the interpretation of these rates. Besides the misinterpretation of percentage rates, others naively compare rates associated with different investment categories. Their naivety reflects in the manner they query or make statements such as:

  1. “Which mutual funds have the highest interest rates?”
  2. “Which stocks have high interest rates?”
  3. “The interest rate of Mfund [money market fund] is higher than that of Epack [equity fund]”

One consequence of misinterpreting percentage rates is the disappointment that follows when lower-than-expected returns are made on an investment. During a chat with John (a follower of Sikasεm) a few days ago, I was not surprised when he expressed the frustration he had recently been through. He revealed:

“I nearly cried when 700 cedis in an account yielded only 4.57cedis.”- John Mensah

I understand many more people have had such an experience before. Yes! It is a very painful experience to go through. However, to avoid or reduce the impact of similar painful experiences, it would be worthy to study a few of the percentage rates we usually come across in investment products.


Annual interest rate

The most common investment products that make use of annual interest rates are Treasury bills and fixed deposits. The interest rates quoted on the various Treasury bills and fixed deposits are annually-based. That is, the return or profit earned on these investment products, when utilising the quoted interest rates, is for a period of one year (12 months). However, T-bill investments do not always mature in 12 months. For instance, the 91-day and 182-day T-bills mature after three months and six months respectively. Hence, the calculated interests need to be prorated (distributed) for the actual maturity periods. That is three months and six months for the 91-day and 182-day T-bills respectively.

To be clearer on this, let’s go through the sample calculation below.

     How to calculate Treasury bill interest

Let’s assume that you invest GH¢1000 at the current 91-day T-bill rate of 13.4700%,

Now, since the quoted interest rate (13.4700%) is an annual (12-month) rate, the total interest on the GH¢1000, after 12-months, would have been (1000×0.1347) = GH¢134.7


However, 91-day T-bill investment matures after three months. Hence the above total interest needs to be prorated for a three-month investment period.

Thus, the real interest to be earned on the GH¢1000 would be (1000×0.1347)/4 = GH¢33.675

Note that 3 months × 4 = 1 year. That is why you see the total (annual) interest being divided by 4

In a similar manner, the annual interest would have been divided by 2 if it were to be 182-day (6 months) T-bill investment.


Another means to estimate your T-bill or fixed deposit interest is to first distribute the calculated annual interest per each month and further multiply the monthly interest by the actual number of months the money stayed invested.  Using the same example above, the interest earned per month would be (1000×0.1347)/12 = GH¢11.225 Remember that there are 12 months per annum (year).

Now, since the money is being invested for 3 months (91-day T-bill), we multiply the monthly interest figure by 3. That is, (GH¢11.225×3) = GH¢33.675


Annual yield

Annual yield is the annual rate of return on an investment, taking into consideration the compounding effect of any intermediary interest earned. Annual yield is most often reported as the investment return on money market funds (a pool of fund invested in fixed income products). Managers of money market funds, while estimating the annual yield, assume that the funds would remain intact in the account for one year (365 days). For instance, the estimated annual yield of HFC Unit Trust on 10th May 2017 was reported as 20.31%. What this means is that assuming the funds in HFC Unit Trust remain intact from 10th May 2017 to 10th May 2018 (one year), the estimated rate of return would be 20.31%. That is, the value of the mutual fund would appreciate by 20.31%. However, since investors continue to deposit and withdraw from mutual funds, the funds are therefore not expected to remain intact throughout the full year. Thus, fund managers keep revising their annual yield on a daily basis to reflect the changes. For this reason, it may be difficult to precisely calculate the return on a mutual fund (money market) investment over a period.

Due to the effect of compounding, investment returns associated with money market funds may not be evenly distributed over the investment duration. Let’s assume that you had invested GH¢1000 in Databank’s Mfund on 12th May 2017. Annual yield of Mfund on 12th May 2017 was 19.88%. Thus, the estimated return (profit) on the GH¢1000 after one year would be (GH¢1000×0.1988) = GH¢198.8 However, the GH¢198.8 takes into account the compounding effects of intermediary profits that are reinvested by the fund managers. As such, it cannot be equally distributed by each of the 12 months. This implies that if the GH¢1000 stays invested for just six months instead of the 12 months, you cannot expect to earn half of the annual profit.

Once again, let’s go through another example using real historical data.


Table: Historical investment value of an Mfund account

Date Mfund value, GH¢ Monthly return, GH¢
30/09/2016 879.41 —–
31/10/2016 894.71 15.3
30/11/2016 912.03 17.32
31/12/2016 928.61 16.58
31/01/2017 945.83 17.22
28/02/2017 958.98 13.15
31/03/2017 971.49 12.51
30/04/2017 988.82 17.33


The table above shows the value of an Mfund investment account (a money market fund) over a seven-month period. Based on the investment values, the monthly returns are also calculated by subtracting preceding values from current ones.

Even though the fund manager (Databank) had estimated an annual yield of about 23% at the time, the returns (as seen in the table) were not equally distributed over the period- They differed from one month to another. For instance, November return of GH¢17.32 had increased from the October return of GH¢15.3. On the other hand, the return in January (GH¢17.22) had dropped to GH¢13.15 in February. Factors that account for non-equal distribution of Mfund returns include, but not limited to, compounding effect of intermediary profits as well as changes in interest rates of fixed income products during the investment period.


Year to date return (YTD)

Whenever we mention year to date, we refer to the period between the start of a calendar year and the present date of the same year. The beginning of the calendar year often has 1st January as the baseline. Year to date return therefore refers to the return or profit made so far, from 1st January to the present day of the calendar year. For instance, a year to date investment return of 10%, as of 30th April 2017, implies that from 1st January to 30th April 2017, a return of 10% had been made on the investment.

Year to date returns are usually reported on equity-related investment products such as the Ghana Stock Exchange (GSE), Epack investment fund, SAS fortune fund and HFC Equity Trust. Similar to the annual yield explained earlier, year to date returns can drop or increase from time to time within a calendar year. Again, year to date returns do not accumulate in a linear functional manner. In other words, they do not distribute proportionally along the calendar year. The mere fact that a year to date return after the first four months (30th April) was 10% does not necessarily mean that the return at the end of the year (31st December) would be 30%. This is due to price fluctuations on the equity markets. On every business day, equity fund managers recalculate their year to date returns based on the present prices of stocks.

It is also important to note that published YTD returns mostly affect existing shareholders than prospective ones. Now let’s have a look at the scenario below:

percentage rates of investments_scenario

From the scenario above, it is clear that the investor lacked understanding of YTD returns. This is a common mistake many prospective investors make when investing in equity funds. As I mentioned before, YTD returns mostly affect existing shareholders. Thus, the 45% the prospective investor noticed in September 2016 was a profit that had been ‘earned’ already by the existing shareholders of the equity fund. To accurately estimate his return, he needed to do that in reference to September 2016 since that was when he made the deposit. According to the scenario, the fund had lost 5% (45% to 40%) from September to December. Hence, the investor had actually lost part of his deposit.

In a similar situation, an existing shareholder who topped up his account in September 2016 would not enjoy profit on the additional deposit that was made in September. Nevertheless, he would enjoy the 40% return on his previous investment (prior to the deposit in September) if that investment had stayed in the equity fund from January to December 2016.


Comparing percentage rates

It is important not to compare percentage rates of different categorical investments. For example, the annual yield of HFC unit trust (a money market fund) as of 10th May 2017 was 20.31%. On the same day, the year to date return on HFC equity trust (an equity mutual fund) was 9.68%. It would be a big mistake to compare these two percentage rates and assume that HFC unit trust performs better than HFC equity trust. This is because the 9.68% return on HFC equity trust is only for the period of 1st January 2017 to 10th May 2017 while the 20.31% on HFC unit trust is a 12-month estimated rate.

On another note, it may not be appropriate to compare the year to date (YTD) returns of two different equity funds in the early part of a year. As stated earlier, YTD returns do not distribute proportionally along the calendar year. For instance, the YTD returns of SAS fortune fund and Epack investment fund, as of 11th May 2017, were 14.51% and 5.4% respectively. While the rate for SAS fortune fund is higher than that of Epack, it may be premature to conclude that SAS fortune fund performs better than Epack investment fund. This is because the YTD return of SAS fortune fund may drop while that of Epack can rise steeply before the year ends. Thus, a more appropriate comparison could be done at the end of the calendar year.

Article: Your savings account not an investment account

Savings _sikasem

Savings consists of the amount left over when the cost of a person’s consumer expenditure is subtracted from the amount of disposable income he earns in a given period of time, according to Keynesian economics, as quoted by Investopedia.

The amount left over is sometimes left in the bank account over a period of time, sometimes over a year.

A recent report published by the Bank of Ghana (BOG) shows Commercial banks in Ghana pay between 3.4% to 16.40% as interest on deposits (savings); an average of 11.20% by all the banks. Click here for full Bank of Ghana Report on the rates.

There are some bank customers who are unaware or careless about these rates and are even happy by just seeing their monies remain in their accounts. However, there are others who complain of receiving minimal interest on their savings while others complain of not receiving at all. The banks are then happier keeping customers’savings with them. In fact, if it tends to span over a long period, banks go the extra mile by offering customers exceptional services such as assigning personal relationship managers.

The BOG report is to guide customers in making decisions regarding their savings/deposits/leftovers and what is being earned on them.

Let’s delve into some reasons people open bank accounts:

  • For Accessibility: To be able to make regular withdrawals during business hours. This is why Banks offer 24/7 ATM service and others for this purpose.
  • For EmergencyPurposes: Money is put aside to cover emergencies. For instance, an unexpected car repair, friends and family requests, loss of job, are supposed to be catered for by emergency funds
  • Savings for Retirement: The earlier this begins, the less the requirement in future. In the period in life when one cannot engage in full time employment, it is necessary that a retirement fund works for you.
  • Saving to make a down payment for House, Car: People save to use as down payment for such facilities. This also provides an avenue for accessing loans. With banks,a better rate could be negotiated if the customer is able to provide a percentage of the cost of the product.
  • Savings to have fun: Another reason to save is to afford the luxury of a vacation.
  • Save for Sinking Funds: Sinking funds are set aside for improvements on car, house and other possessions. This fund can free the emergency fund.
  • To earn interest: The opportunity to earn an interest of “3.4%” is always better than keeping the money under your pillow.
  • Savings for education: Additionally, people save for future education. Masters and doctorates can be achieved by taking the first steps of savings.Children’s education is also a factor to save money.

From the reasons above, it can be noted that apart from savings for accessibility, funds for the other reasons are likely to be kept for up to a year or more. In this case, the left overs.

It is necessary to fish out good returns in order not to lose money, especially to inflation. Therefore, it is better to invest the money.

Again, according to Investopedia, an investment is an asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will be sold at a higher price for a profit.

From the rates published by the BOG, the rates quoted are mostly lower than inflation rates, pointing to loss of purchasing power in real terms.

None of the rates also match up with rates offered by investment firms in the country, making it risky to save money over a long period in a bank account.

Treasury bills, for example, have over the period offered savers/investors cushion on inflation.

Savings _Tbill return

Real return over the years on the 91 day Treasury Bills, though not very impressive, has provided the necessary cushion to protect the purchasing power of investors.

From the graph above, since 2006 to 2016, it is realized that though real return is quiet slim, it’s still better than negative.

The Ghana Stock Market is also an avenue that gives appreciable returns.

Savings _stocks return

Unilever Ghana Ltd, Enterprise Group Ltd, Ecobank Ghana Ltd, Fan Milk Ltd, Benso Oil Plantation Ltd, GOIL and GCB Bank are a few selections of companies listed on the Ghana Stock Exchange that have returned appreciably to investors. An average of 13.65% inflation rate is far below the average return of the seven stocks of 258%, when funds were kept from 2007 to 2016.

Bank savings accounts are not investment accounts. Opening bank accounts should not be the prime motive; how much we earn on our monies should also be of concern to us.


Credit: Kofi Busia Kyei (Financial Analyst)


Are savings accounts worth opening?

savings accounts worth

By definition, a savings account is a type of account that bears interest on deposited funds. One core principle of finance, known as time value of money, is of the view that money currently in hand is worth more than the same amount in the future. For instance, if you had deposited GH¢100 in your account a month ago, that GH¢100 is considered less valuable today than it used to be a month ago. It is due to this basic concept why interests are paid on deposits made in savings accounts.

Unfortunately, savings accounts come with a number of drawbacks that make them less appealing. The utmost drawback is the low interest rates paid by the financial sector. Many financial institutions barely pay significant rates on clients’ deposits. According to figures published by the Bank of Ghana, the average interest rate paid by the banking sector was 11.9% as of 31st January, 2017. The same publication showed that a few banks such as Standard Chartered Bank even paid as low as 4.3% on clients’ deposits. Meanwhile, inflation for the same period (January 2017) was 13.3%. The low interest rates on savings accounts therefore discourage investors who wish to earn appreciable returns on their deposits. As highlighted at the beginning, money currently in hand is worth more than the same amount in the future. Thus, if you’re the type obsessed with earning good returns on your money, you may be disappointed and keep pondering if maintaining a savings account is worth it. Just as Robert Gray Allen asked some years ago:

How many millionaires do you know who have become wealthy by investing in savings accounts?

Another disadvantage of savings accounts is the minimum deposit limitation imposed on clients. Most banks require savings account holders to keep some minimum deposits in order to qualify for interest payments. For instance, if a bank impose a limit of GH¢50 on savings accounts, clients would be required to leave not less than GH¢50 in their accounts to qualify for the interest payments.

Besides the minimum deposit limitation, there is also a restriction on the frequency at which a client can withdraw from his account. In general, savings account holders do not have the same withdrawal freedom enjoyed by other account holders. For example, some financial institutions restrain their savings account clients from making more than two withdrawals in a week. Others impose penalties (in the form of fees) on clients who still wish to exceed their withdrawal frequency limits.

Even though savings accounts have their downsides such as the ones listed above, they equally have their bright sides too. Just like the saying goes,

To every disadvantage, there is a corresponding advantage”- W. Clement Stone

A notable advantage of savings accounts is easy accessibility of money. Although there is limitation on withdrawal frequency, the accessibility to deposits in savings accounts is comparatively better than that of other investment options such as mutual funds. This ensures ready availability of money when in need. Moreover, the associated risks in savings accounts are low in the short term. Thus, savings account remains one of the most preferred funding options for emergencies and short-term goals.

Additionally, a savings account may also facilitate savings culture of some individuals. There are a number of people who find it difficult to manage both their expenses money and savings in a single account, usually a checking (current) account. By opening a savings account (separately from their current account), such individuals may find it easier and uncomplicated to manage their savings.

Finally, money meant for investment can be temporarily deposited in a savings account pending potential investment opportunities. There are occasions when lucrative investment opportunities come along the way. For instance, a prominent and profitable organisation may decide to list on the stock exchange during which you require available money to purchase some of their shares. In such instances, you can take advantage of the temporarily deposited fund. Some investors describe this fund as opportunity fund. Opportunity fund is temporal money you set aside pending any finalised investment decision or potential investment opportunities. Instead of the money waiting idly for such opportunities, it would, at least, earn something extra (even though meagre) when deposited in a savings account.

The bottom line is that savings accounts may not be dependable and appropriate as investment options in the long term due to their low interest rates. Nevertheless, they are quite useful when it comes to financial needs for emergencies and short-term goals.

See also: Is Treasury bill investment worth it?

Average interest on deposits slightly drops to 12.2%

banks interest rates

The latest Annual percentage rates and average interest rates report released by the Bank of Ghana has shown that the average interest rate on deposits have reduced from 12.3 percent in May to 12.2 percent at the end of September this year. (Click here for full list of updated interest rates)

Out of the 30 banks covered in the report, which the BoG says it published to promote transparency in the pricing and provision of banking services, UT Bank offers the highest interest rates on deposits; 15.8 percent.

The second highest of 14.7 percent, is offered by Stanbic bank. Fidelity Bank comes up third with 14.5 percent followed by First National Bank’s rate which is 14.4 percent.

Ecobank, Capital Bank and Access Bank are all at the fifth position with average interest on deposits at 14.3 percent.

They are also followed by GT Bank with 14.1 percent.

The seventh, eighth, ninth and tenth positions are occupied by GN Bank, UniBank, Bank of Baroda and Barclays Bank.

Their rates on deposits are 14, 13.8, 13.7 and 13.4 percent respectively.

New entrants, Sovereign bank is at the 11th position with 13.3 percent.

It is trailed by UBA with 12.8 percent, Sahel Sahara Bank 12.6 percent, HFC Bank 12.4 percent, Energy Bank 15.1 percent at the 12th,13th, 14th and 15th positions respectively.

Societe General is 16th with 11 percent, with CAL Bank at the 17th position with 10.7 percent.

Meanwhile FBN Ghana’s 10.4 percent places it at 18th position.

While the 19th and 20th positions are occupied by NIB and Prudential Bank with 10 and 9.4 percent respectively.

Counting from the bottom, Standard Chartered Bank offers the least interest on your deposits; followed by Agricultural Development Bank, then Zenith Bank and GCB bank.

Their interest rates are 4.4percent, 6 percent, 8.7 percent and 9.8 percent respectively.

Source: citibusinessnews