A fixed deposit is a type of savings account offered by banks and financial institutions. It allows customers to earn interest on their deposits over a fixed period. This safe and secure way of saving money is ideal for individuals who want to earn guaranteed returns without risking their principal amount.
During the deposit term, customers cannot withdraw their funds without incurring penalties or losing interest earnings. At maturity, however, they can withdraw the entire amount and accumulated interest or renew the fixed deposit for another term.
Finding FD Maturity Value
The maturity amount of your FD is the sum of the amount you invest with the interest rate you earn on it and is based on the tenure you choose, the amount you invest, and the type of pay-out method you select. It also depends on the type of fixed deposit account you have created.
How to Calculate FD Interest?
The interest rate of an FD is calculated based on two methods: simple interest and compound interest. Some banks may even use both methods to calculate the interest rate of your FD depending on the amount deposited and its tenure. However, what's the difference when calculating the two? Let's see:
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Simple Interest
When calculating fixed deposits with simple interest, the interest is earned only on the principal amount.
The formula to calculate simple interest on FD is principal (P) x rate of interest (R) x time (T) which is divided by 100. For example, if you’re investing ₹10,000 at an interest rate of 8% per annum for 5 years, here’s the interest you’ll earn at the end of the tenure:
Step 1: 10,000 (P) x 8 (R) x 5 (T) = 4,00,000
Step 2: Divide the sum by 100. 4,00,000/100 = 4,000
Hence, you earn ₹4,000 interest for 5 years at an interest rate of 8%.So, if you're investing ₹10,000 in your FD account, you will get back ₹14,000 at the end of the five-year tenure.
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Compound Interest
When calculating fixed deposits with compound interest, instead of earning interest only on the principal amount, the interest is earned on the principal amount as well as the interest rate.
For a 5-year FD of ₹10,000 with an 8% annual interest rate, the interest will be compounded on the ₹10,000 principal amount and the 8% interest rate. Here’s how:
Year 1: The interest is counted using the simple interest method for the first year of the tenure.
₹10,000 (P) x 8 (R) x 1 (T) / 100 = ₹800
Hence, the first-year interest earned on ₹10,000 will be ₹10,800, which will be your second year’s principal amount.
Year 2: For the second year, you’ll earn 8% on the principal of ₹10,800.
₹10,800 (P) x 8 (R) x 1 / 100 = ₹864
This sum is added to the new principal amount from the first-year interest, making it ₹11,644.Like this, the calculation can go on for the remaining three years.
However, banks may calculate interest yearly, quarterly, monthly, or even half-yearly. So, instead of this calculation, another simple formula is applied where the principal amount is multiplied by the rate of interest and raised to the tenure, for example:
Compound Interest (CI) = Principal (P) {(1 + i/100)n – 1}
P = Principal Amount
I = Interest Rate
N = Number Of Years
CI = 10,000 {(1+8/100)5 – 1} = ₹4,693So, the total amount after the end of the tenure through the compound interest method will be ₹14,693.
Use our calculator to estimate your returns in a Freo FD. You can also compare it with any other bank’s returns.
How to Maximise the Returns on Your Deposit?
Several factors affect the returns on your fixed deposit. When they are adjusted, you can maximize your returns. Here's how:
Increase the deposit amount or principal amount to gain higher interest
Focus on investing in a cumulative FD for a better interest rate than a non-cumulative FD
Frequent compounding of your FD can also reduce the interest you might earn on your savings
A higher interest rate on your FD will give your higher returns
Take advantage of Freo’s High Yielding FD Returns with an interest rate of up to 9%!
Bottom Line
The interest rate is never the same for every tenure of an FD. This means that even the longest tenure won't get you more interest rate. Hence, you need to check the interest rate before selecting a tenure period.
FAQs
1. What parameters are used to calculate the interest on your FD?
The rate of interest, the principal amount of investment, and the tenure of your investment all contribute to the interest you get on your FD. If you have selected the compound interest method for determining the interest of your FD, you should know that frequent compounding can also decrease the interest you may get on your investment.
2. Why should you understand the importance of calculating your FD?
Understanding why calculating the interest on your FD is important helps you make wiser financial decisions. You’ll know how your money will grow, which will help you choose your ideal FD plan, type of FD, and tenure.
3. How are simple interest and compound interest calculations different from each other?
Simple interest only allows interest on the principal amount; that’s the amount you’re investing. While in compound interest, the interest is calculated on the principal amount as well as the interest rate, making it an interest on interest earning.
4. Is FD calculated monthly or yearly?
The interest earned on the principal amount you deposit in your FD is calculated on a yearly, monthly, or even quarterly basis.
5. Which bank offers the highest FD rates?
Freo Save’s FD account is among the highest-yielding accounts as we offer an interest rate of up to 8.7% every year.
6. What influences the interest rate of an FD?
The interest rate of an FD generally depends on the country’s economic state, RBI’s policies, the type and duration of the FD, and the investor’s age.
