What is a capitalization deposit in simple terms.

Storing money requires choosing the most effective tools. For example, a capitalization deposit. It is necessary to understand what it is and how it works in simple terms. This means not only a description but also the principle of operation. 

Understanding what a capitalization deposit is useful for investors as well. So, in general, it is a useful and quite effective tool. 

What is a capitalization deposit? 

Let’s start with what a capitalization deposit is. It is a fairly simple and understandable way to store savings. This way, it is possible to increase them with minimal risks. In simple terms, it is a bank deposit where the interest accrued over a specific period is added to the principal amount of the deposit and then participates in the calculation of future interest. This mechanism allows increasing the profitability of your deposit due to the effect of compound interest.

If we talk about Ukraine in 2024, this mechanism still works, despite the complexity of the situation in the country. 

A few words should be said about how a capitalization deposit works. In general, it is a fairly simple mechanism:

1. The client chooses a bank and makes a deposit with it. This deposit has a certain term. 

2. According to this deal, the bank continuously accrues a certain percentage. This happens according to the deal and without changing the frequency or terms. 

3. Then, these percentages are added to the principal amount of the deposit (capitalized).

4. From the next accounting period, the interest is accrued on the increased amount.

To make it clear, let’s take a simple example. For instance, a client invested 100,000 hryvnias in a deposit with an annual interest rate of 10% and monthly capitalization. After a month, the bank will accrue 833.33 hryvnias in interest (100,000 × 10% ÷ 12). This interest is added to the principal amount, and in the second month, interest will be accrued on 100,833.33 hryvnias. That is, on such savings, you can earn more. 

What are the advantages of such deposits? 

Deposits as a whole have a number of advantages. That is why they do not lose relevance, even in the conditions of war in Ukraine. What is being talked about: 

1. This way, you can quickly increase your income. Thanks to capitalization, your deposit 'works' more efficiently than under a standard interest accrual scheme.

2. You can also protect your funds from inflation. Capitalization helps partially compensate for rising prices, as the deposit amount grows faster.

3. Such a deposit provides safety as well. Bank deposits in Ukraine are insured by the Deposit Guarantee Fund, ensuring the protection of your money.

Moreover, such deposits have sufficiently flexible conditions. Many banks offer different terms and capitalization schedules (monthly, quarterly, annually).

In general, both standard deposits and capitalization deposits have several advantages and differences. For example, in a standard deposit, the interest is paid out to a card or account, while in the other case (with capitalization) the interest is added to the deposit sum. These types differ in profitability as well as in overall convenience. However, in 2024, you can choose either type of deposit in Ukraine. 

If the main goal is to maximize income and you are ready to leave your money for a long Time, choose a capitalization deposit. If regular income is required, a standard deposit would be more suitable. In other words, there is always a choice. 

Capitalization deposit in Ukraine in 2024 

So, in 2024, choosing a bank and deposit conditions requires special attention. In the conditions of war, any financial losses can be critical. How to choose the right capitalization deposit: 

1. Determine a reliable bank. Check the bank's rating and its participation in the Deposit Guarantee Fund.

2. Determine the appropriate interest rate. The higher the rate, the greater the income. However, avoid suspiciously high rates – this may be risky.

3. Evaluate the capitalization schedule. Monthly capitalization yields more income than yearly.

4. Assess the term of the deposit. Determine for how long you are willing to freeze your funds.

5. Immediately determine the minimum deposit amount. Make sure that the amount you plan to invest meets the bank's requirements.

Along with this, it is important to understand that such deposits have significant risks. We are talking about frozen funds. They are, in essence, there, but cannot be accessed at any moment. In other words, this is a downside of any deposit. Money cannot be withdrawn until the deposit term is over, otherwise, you will lose part of the income.

Also, such deposits are greatly affected by inflation. If inflation in the country is higher than the interest rate, the real profitability of the deposit decreases. This nuance certainly needs to be taken into account in Ukraine in 2024, when the country continues to experience war (which inevitably negatively affects the country's economy). It is also important to consider changes in deposit conditions. They cannot be predicted in advance, nor avoided. Some banks may change conditions for early termination of the contract.

Which banks in Ukraine offer capitalization deposits? 

Ukraine has a well-developed banking system. This means that there is a huge choice. This plus also applies to capitalization deposits. The most popular options are: 

1. PrivatBank. Usually, payments on such deposits are made monthly. 

2. Oschadbank. Usually, payments are made once a quarter or once a year.

3. Alfa-Bank Ukraine. There are different options for deposits. 

The choice of bank can be made right before signing the deal. After all, the conditions of the banking system change (overall in the country), and any bank that continues to operate under war conditions may introduce some changes. Therefore, it is always necessary to rely on up-to-date information.

In general, before signing a contract, one needs to weigh everything carefully, as such deposits are known for many restrictions. They do not suit all clients at all times. It is also always necessary to clarify the current information and assess one’s own capabilities, not just the benefit. One must also consider the instability of the situation in the country. This is one of the most significant factors for Ukraine in 2024.